Shivalik Rasayan - Value Play


(EL) #1

Shivalik Rasayan Ltd

Disclosure: Invested small quantity

I searched and although Shivalik was a great wealth generator, the company doesnt seem to be discussed here. I wish to put some figures for consideration from what looks like a good value play. I have taken a small tracking quantity.

Shivalik is undergoing an expansion
For the purpose of expansion they issued preferential shares of 44 lakhs at the price of Rs.326 each which brought in a capital of Rs.143 crore

Current Shivalik market cap (after the 143 crore funds raised) is 370 crore.

If you set aside the new money raised as I assume that money is still not put to use to generate profits as yet, the remainder market cap of Shivalik is 227 crore

Shivalik as per annual report also owns 39% of Medicamen Biotech.
Medicamen is valued at 599 cr.
39% of 599 crore is 233.6 crore
Usually holding companies are traded at a discount of 30pc the assumption being if they were to sell their investments and distribute the capital it will attract a tax of roughly 30pc. So if Shivalik was only holding Medicamen and nothing else, the market cap would be roughly 163.5 crore

Deducting 163.5 crore from the 227 crore we got earlier, for the current business the market cap is 63.5 crore (Their expansion is 185 crore as you would see below but lets deduct just the new capital for now and 70% of medicamen)

The current standalone profit of 1.18cr per quarter equates to roughly 4.73 per year. This equates to a rate of 7% on 63.5 crore or a PE of 13.

Medicamen risk
Major calculations above include the value of Medicamen. If this is inflated then eventually Medicamen market cap would come down so its essential to look at Medicamen a bit to understand if we are dealing with highly inflated market cap.

11pc of Medicamen is owned by Parmadanica. Parmadanica is a subsidiary of MissionPharma.
KLAUS SNEJ JENSEN is the COO of MissionPharma as well as MissionPharma’s chief Pharmacist. Mr Klaus is also on the board of Medicamen. Mr klaus is not on the board of any other listed company so he must be working quite closely with Medicamen
MissionPharma does not manufacture any medicines as per the below excerpts from their annual report:

Missionpharma supplies generic pharmaceuticals, medical devices, medical kits and hospital equipment to countries outside the EU – primarily in Africa and Asia. Customers include ministries of health, central medical stores and public procurement agencies as well as NGOs, funders and private wholesalers. The
products are both sold in bulk and kits. Missionpharma is not a manufacturer itself whereas all products are sourced globally from manufacturers.

So looking at the “possible” value of Medicamen future sales it’s good idea to check what MissionPharma’s cost of goods/material is. As Medicamen is likely to get a slice of that pie. Missionpharma material purchases for resale in 2017 as per their annual report - converted to today’s exchange rate - is in the region of INR 440 crore.
Medicamen sales is 118 crore, profit of 10 crore, pe of 57. Lets say normal pe for generics business is 20 like Cadila. So back of envelop calculation, market is expecting medicamen to have revenue of around 350cr as below

medicamen1

Its unlikely Medicamen will be able to procure a big part of MissionPharma’s yearly requirement of 440crore however they do have the capacity as per their 2016 annual report so depreciation is likely to remain at current level and because of MissionPharma being on board probably new generic drugs development is targeted at higher margin products. MissionPharma is growing as well and as part of a listed company they would have growth plans. I am not sure how Medicamen fits into it but I assume with board, shareholding, etc they have plans to use the underutilised Medicamen plant

Shivalik Expansion
Looking at the expansion, Shivalik initially took an approval (board,shareholders, environment,etc) for expanding their existing products. The expansion of existing products was in the region of roughly 5 times their current capacity

Expansion plans - reviewed and changed
It appears that once Shivalik management had an understanding of Medicamen business they realised that

  1. There is more money to be made in API intermediates
  2. They have almost ready market in Medicamen as Medicamen is growing and have used roughly 60+ crore of raw material last year.
  3. As per Annual report, India does not currently have capacity and a lot of it is imported from China

They have now changed their expansion project from old business to API intermediates business

Live date for expansion
They have received all approvals for the change of plan with an expected production commencement date of December 2019.

shivalik/medicamen intergroup sales
Medicamen cost of raw material is around 59pc. Lets say Shivalik fulfils roughly half of it. So Shivalik is looking to generate a revenue of 150 crore, which is roughly 3 times current revenue. Their last expansion plans for their old products was 5 times capacity. So 3 times probably sounds very conservative. They also said the raw materials currently have to be imported from China and their new plant is state of art which would make them more competitive. So on the expansion capital of 143 crore they will most likely make 14 crore (150 crore / 44.82 * (5.79 - 0.73) x .70 after taxes
14 crore over 143 crore is an excellent return of 10pc per annum or a pe of 10

The expansion so far has been without debt other than recently raised more capital. Their annual report says their proposed investment for new plant is shown as 185 lakhs. I am assuming this is due to oversight. No one will talk a lot on an investment of 1.85crore. They probably mean 185 crore which ties in with the recent capital raised.

Shivalik standalone historic figures:

Shivalik consolidated snapshot key figures
shivalik3

Shivalik consolidated figures


(Padmanabha) #2

Thank you for creating the thread. Actually the 44lakh share is yet to come and is not included in present market cap of Shivalik Rasayana. Further Medicamen bio is also expanding and they are doing oncology plant which will be operational from next year. The revenue of medicamen is expected to increase. For the expansion Medicamen bio has realised fund by issuing preferential allotment viz: 306000 shares at 543 and 324000 at 618 for promoters and public which is above the current market price. The revenue of 150 crore looks small( yes in initial years of operations we can expect lesser revenue) less when compared to the investment of Rs.185 crore.

Disc: I am invested


(EL) #3

You are right, I was confused due to shares in issue last year and this year - I think due to bonus and share split.

So it doesnt look like a great buy at this moment

377 crore - medicamen 163.5 crore = 213.5 crore against a profit of 4.73 crore a year gives a somewhat large PE of 45 or a return of 2.2pc on invested capital if one would buy the entire company and take it off the market.

If you add profit after dec 2019, I think its roughly 14cr + 4.73cr on an investment of 377cr + 143 cr
A return of 3.6pc or PE of 28


(niravacharya) #4

Excellent analysis. Looks like a long term play…


(puneetc) #5

Have been invested in this since July’16 and it has already been a 5 bagger for me in just 2 years. Although I started with a miniscule amount with tracking quantity, kept on adding as the consistent performance strengthened my conviction.
Recently visited their Dehradun plant. Although couldn’t meet anyone from the management since it wasn’t a planned trip but based on the interaction with the staff I got to know that the plant had been running at 100% capacity utilization operational 7 days a week.

Disc: Invested with high conviction


(EL) #6

Yes growth in profit is going to be atleast 5 times from here within a year and half
If the Pe remains what it is of Shivslik’s and the entire market’s this has potential to become 5 bagger in one and half year
A little bit of patience is needed as everyone thinks markets might be weak until we are at the other side of elections but again markets generally do opposite of what is expected of them


(srvn) #7

capex is relatively huge 185 cr - 4x revenues. But is there info on management’s estimate of capacity creation for the oncology API which they propose to produce from end of 2019 (apparently there is no analyst meet-transcripts or press release)? Also do we know the name of the oncology API? These details will help in realistic estimate of incremental growth.


(EL) #8

Yes its huge. It has potential to generate 5 times current revenue and most of it has a ready customer

The way I look at cash flow+ capex usually is (operating cash flow + investing cash flow)/Revenue. If the company is not growing we should get atleast 5%. Shivalik over3 years that it has acquired other companies has grown so this ratio for period of standalone when it has not grown is great measurement of efficiency

There is a filing with Gujarat pollution board that gives more details on the exact oncology API. I’ll try to post it later.


(puneetc) #9

I’m planning to attend the AGM this friday. Please let me know if there are any questions you’d like to get clarification on by the management. I’ll try my best to put those forward during the meeting.


(EL) #10

Thanks. I have some please -
How much percentage of production of the new plant is expected to be used within group
What is their expectation of capacity utilisation on new plant over next 3 years
At full capacity at current market rates what is the revenue they would expect from the new plant
What are margins at current market rate
Who will be their biggest competitors in India and overseas for the new plant
Their medicamen holding last year was 42pc and now it’s 39pc, why did they reduce


(puneetc) #11

I think the stake reduction on Medicamen was due to the capital raising that they did through preference issue they did for medicamen.


(niravacharya) #12

My queries:

  1. When will new capex start showing growth in revenues. If any guidance on break even is there for new capex ?
  2. What will be utilisation % for new capex after commissioning.
  3. Market prospectus of products under new capex
  4. Revenue guidance for coming years ?

(EL) #13

This is the link to new environment clearance and list of products they are planning in the new plant @srvn

http://environmentclearance.nic.in/writereaddata/modification/Amendment/Attach_file/27102017MYR9MU9Tpfrann57compressed.pdf


(srvn) #14

I was going through financial statements of both shivalik and medicamen. As I understand approx 40% of Medicamen is held by Shivalik. What I see is Shivalik’s standalone+medicamen’s standalone=Shivalik consolidated; this is true for eg: in P&L - revenue and eps etc. follows this; This lloks like overstatement; For all practical purpose, (eventhough the stake is controlling in nature), shouldn’t it be shivalik standalone+40% of medicamen standalone = shivalik consolidated? Am I missing something here?


(EL) #15

I think medicamen is an associate (and not a subsidiary) under accounting GAAP rules hence from what I know, 40% of Medicamen profit (not revenue) will be shown in Shivalik as other income

If it was a subsidiary (50pc + control) then Shivalik would show all of medicamen revenue as its revenue and then remove minority interest

In both cases (associate or subsidiary) intercompany revenue that is not realised has to be removed from consolidated. For example if Shivalik sells Rs120 worth of goods to Medicamen out of which Shivalik’s cost is 100 and profit is 20 and Medicamen still has those goods in inventory, wip or part of finished product and have not subsequently sold off, then, from the group profit, 20 has to be withheld to be shown whenever Medicamen downstream transaction completes


(Padmanabha) #16

Till Now Shivalik shown the full revenue of Medicamen Bio in their consolidated statements. Since last quarter they started showing profit for controlling stake I.e.for 40%. Since last quarter the consolidated EPS of Shivalik contained the 40% profit from Medicamen.


(Padmanabha) #17

As of now there is no intercompany revenue. The present business of Shivalik is Agrochemicals. The API plant is yet to come and the inter company revenue may start after their new API plant starts commercial operations.


(srvn) #18

Thanks for clarification. I had gone through till 2018 March results; to me it looks an over representation when you add 100% of Medicamen’s rev and earnings to Shivalik’s accounts when in fact you don’t own 100% of it; consolidated statements doesn’t look like minority interests have been reduced; further i could find arithmetic errors as well in their 2016-17 financial statements - though the impact isn’t huge, it makes me wonder not to take the stated nos. at face value


(EL) #19

@srvn
Refer to my post
Medicamen is an associate besides Shivalik is following IAS.
I am aware auditors sometimes overlook, accounts receivable or inventory which inflates profits as was done with shilpi but this is only because they are lazy or take management word at face value. This relying on management will not cost them their practising license

However there are some rules on consolidation that they have to follow otherwise they will be stripped off of their practising license

Because Medicamen is an associate, accounting rules (developed with lot of discussion papers borrowed from IFRS rules) require a certain treatment to these figures.

If you find there are anomalies you should in the interest of proper discussion and for the benefit of all of us so we can learn present it with excerpts from the financials

With all due respect we might be completely wrong and you might have found an improper treatment of accounting policies

Your post says so - which we appreciate your research into. So why not present the figures of where you found the anomalies. If you are correct it will save us all from the mistake of investing here

Nevertheless thank you for looking into it briefly. I would be very appreciative if you present your findings in a manner we all can arrive at the same conclusion from it as you have


(srvn) #20

Ref post: disc:1) no holding;2) not an accounting expert ( its likely that I may be wrong here; looking here to better understand the nos.) 3) as always base your inv. decision on multiple factors not just one

as per annual reports

Shivalik Standalone Medicamen Shivalik Consolidated
Total Income 51344006 101127435 152471440 AR 17-18
90824156 Controlling interest
61647285 Non-controlling interest

Shivalik consolidated

24.06 EPS
4208000 No of shares as of 31/03/2018
A 101244480 Income as per calculation (no of shares * eps)
B 90824157 Shivalik standalone+39.04% of Medicamen
10420323 Difference in 2 approaches:
2.5 EPS over statement (difference/no of shares)

as per AR 17-18, medicamen is their associate comp where they have mgmt control; no other subsidiaries,associate companies are listed;