Everest Organics: High growth Micro cap stock from API space

About the company
Everest Organics Limited is a Company incorporated in the year 1995 as a public listed company engaged in the business of Manufacturing and sale of Active Pharmaceutical Ingredients and Intermediates.
● Dr. Sri Kakarlapudi Srihari Raju, (MD, MBBS), is a Promoter and Managing Director of the Company.
● Everest is in the business of Manufacturing of API’s for more then two decades.
● EOL API manufacturing site is located in Sangareddy District, Telangana, factory area occupied in a total area of 33 acres of land of which 10 acres of land covers the infrastructure and remaining 23 acres of land is covered with green belt.
● Due to its strong R & D Capabilities, Everest offer various kinds of services in addition to supply of APIs. It undertake long term contracts for manufacturing intermediates and development of new APIs.

Products and Development
− The state of art USFDA facility at a single location has nearly 15% of global prazole market share. The portfolio has diversified beyond prazoles and includes Omeprazole, Esomeprazole, Pantoprazole, Fenofibrate, Dexlansoprazole, Rabeprazole, Itraconazole, Rivaroxaban and Febuxostat.
− Strong R&D Capabilities leads to enhancement of portfolio.
− Enhanced focus on anti-viral segment, Oseltamivir (under commercial stage) and Remdesivir (under lab scale trial).
− Supply to more than 40 countries, strong presence in South Asian countries.
− In the process of registering products in China.
− Exploring Regulated market opportunities in US and EU.
− EC clearance received for 3X expansion in capacity. This would also enhance R&D capabilities.

Financial Snapshot
− FY20 Revenues of Rs. 168 Cr.
− FY20 ROE, ROCE are at 33, 35 respectively.
− FY20 D/E is at 0.4 and is reducing YOY.
− FY20 PAT of Rs. 10.9 Cr.
− MCap at 204Cr and 18 price multiple @ CMP 270 on 24.12.20

Shareholding as of March 2020
− Total Share Capital: 8 Cr.
− Promoters hold 73.79% and Public Holding 26.21%.My Views

My Views:
Cons:
● Major client base and their dependency data is not available.
● EOL Planned CAPEX to increase capacity to 3× and environmental clearances already got but how will they raise the funds and when the CAPEX will complete are big factors as their leverage ratio is high now
● Highly competitive API sector
● Any policy change from domestic and foreign may affect the demand of its products.

Pros:
● In response to the changing conditions in this key market especially Chinese market, the company’s Active pharmaceutical Ingredients and Intermediaries manufacturing business has seen a greater traction. In FY 2019, revenues from API’s grew by 38.56% over FY 2018. The strategy of building sustainable and growing API revenues involves deeper customer relationships, new product portfolio and ramping up of base businesses in key geographies.
● It has been remarkable success story of growth, with investment in right places especially in upgrading pollution control your company has successfully achieve not only higher top line and eventually converted them to sustainable bottom-line. With strict norms in China regarding polluting industry and overall business environment between US-China, your company is strongly placed to reap maximum benefit from the same.
● For the first time in the history of Everest Organics the company has declared maiden dividend of 10% to its shareholder there by sharing the wealth in a small way. Let me assure you that this is just a beginning and I am quite confident that we shall be in even better position to create much larger shareholders value in near future.
● Considerably reduction in debt
● 3× capex with rising demand assures the revenue visibility
● Valuations are attractive when compared
● Reasonable credit rating
● Considering the future potential EOL may show good performance.

All are requested to please go through the data and correct me or enlighten me if anything wrong or needs to update.

Thank you
Kalyan
Disc: I had small quantity

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Source : Tijori

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What do you think about the company’s pricing power and growth potential in highly competitive APIs space?

Also, do you see any moat in their business?

Dear chethan- It has a USFDA compliant single plant with 15% global share of prazoles.
As EOL is under commercial stage of anti viral drugs (Oseltamivir) pricing power might enhace in future.
EOL got the EC clearance to the proposed CAPEX.
I dont think that it has the MOAT in any of the segment.

Dis: Invested in small quantities…

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The last quarter profit and loss statement said Everest organics is in the process of buying pellets manufacturing company, from NCLT for around 13cr

Also their annual report for 2020 said that most of their plants are completely utilised so I don’t think there is potential for higher revenue although they have been diversifying into costlier APIs

If and when the new plant is commissioned, they might do really well

As of now I think if the pellet deal is finalised, we should see some cost savings as well as possibility of launching more expensive medicines while maintaining quality in-house

The company puts out very limited info

The usfda plant for a small company is a huge plus. I don’t know any small company of this size that has a usfda certified plant so their products are well received in the market

There was also a case of locals near their factory unsatisfied and there were some demonstrators, that issue brought the price down of shares quite a bit.
The issue I believe is sorted and their new expansion when it is live will be a big plus

This quarter is likely to be positive because Glaxo pulled out all Ranitidine due to its carcinogenic properties and prazoles are direct replacement for ranitidine. There was a shortage of prazoles

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Dear Edward libo,
Thanks for the genuine inputs…
Can you identified any negative points in the balance sheet, cash flows etc.,

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I work in finance, I told my friends some of the faults on few companies financials long before they were picked by Main Street analysts

I didn’t find any issues on Everest balance sheet, cash flow or profit and loss account

There is a strong chance Everest might see 4 digits stock price within 3-6 months
Firstly because we are in bull market
Secondly their capacity utilisation is high, they are adding a plant plus buying a pellet plant plus getting approval for expensive APIs

One of their in-house developments is rivaroxaban, the patents for which expire in 2024 so it still commands a huge price in countries where patents are not enforced like South American, Iran etc

Look at what Caplin was able to do for a few years selling out of patent drugs into these countries

We could be absolutely sitting on a huge potential here just selling rivaroxaban and nothing else

Secondly to make tamiflu, remdesivir and rivaroxaban says of the in-house expertise

Caplin is much larger company but doesn’t have this capacity
Companies like Gujarat themis which is one drug company have done well so it’s a matter of time Everest will catch up in a big way

I will upload my financials spreadsheet which should make it clear the financials are in great order as soon a I am on a pc. I am just typing this from memory, the potential is huge over next 2 quarters

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Dear edwardlobo,
Thanks for your detailed answer…

Be safe and stay safe.

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@Edwardlobo,
I didnt fully understand who is running the company day to day? like CEO?
Is it Sirisha? , it looks like a old company started by a NRI doctor, how seriously are the promoters involved in this business? and whats their focus? their professional practice or this business? Looks like most of the directors are family members. Just trying to understand what will be triggers for a 30 year old company to see a new phase of growth…in a fast phased manner…
Do the promoters still live abroad and carry medical practice as their profession?

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Did you read the annual report and some of the last filings ?

yes, i went through some of the quarterly reports and recent annual report, their website and some obvious google search but didnt get a clear idea…
What I am interested to understand is, are the promoters running the business with actively? or is it their 2nd priority…if its their 2nd priority, it might run as same pace…
Is Dr Srihari Raju at the helm operations or is it Sirisha? or someone else?

It’s Dr Raju who is at the helm and is very committed to grow the business

The present promoters bought into this business so you might like to see the results from that day onwards

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thanks @edwardlobo, like you mentioned , very little information on the company.
I might not have fully understood the story but I get a feeling that you have done your work. I will try to update back as I learn more about it. But with micro caps, information is generally very scanty.

thanks @edwardlobo for your detailed inputs. One thing the company keeps mentioning is that they have EC clearance to increase the Capacity by 3X. However they have not mentioned any concrete timeline on this. Do you have any insights ?

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I think for this year it’s just the pellet plant and next 2-3 years the planned capitalisation is lower

It’s probably just incremental capex, I don’t think the 3x plan is finalised

The problem for smaller companies would be funds, they are optimally funded and any capex will need more equity or debt both risky

If promoters don’t have big pockets and don’t want to pledge shares is difficult to source
Any share pledge again is negatively viewed by markets

So for now they are playing safe and reinvesting profits for next 3 years and concentrating on producing APIs where margins are higher

The pellet plant might bring 25-30% growth and next 3 years capex will bring similar growth

It’s not going to be like exponential growth like Gujarat Themis

If you’re happy with consistent compounder over many years then it’s the place to be

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Got it , thanks for your thoughtful response! Even my sense is that is a consistent , put-your-head-down type of company.

Do anyone have any insight on what is the market size of Prazole / other API of EOL ? I noticed the plant manufacturers 15% of global d demand.,? Are there any companies in be India produces same API?

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Can some one confirm that company’s plant is still complied with USFDA. I don’t find the company’s name in USFDA GADUFA facility payment list (all companies have USFDA approved plant has to pay fees on annual basis). Also in website the company only claims GMP certify plant.

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Compqny has received temporary plant closure order from TSPCB. Will this have material impact on the operations in short run?

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