with pharma stocks being the darlings of the markets recently, there is one company which seems to be sleeping off the bull run. fdc seems to be a value pick within the sector.
cmp 83, market cap 1500 crores.
cash and equivalents (including investments) is around 380 crores.
ev is close to 1020 crores.
fy 12 pat is at 132 crores and pat for fy 11 and fy 10 was at 148 crores.
buybacks:
company bought back 17 lac shares during fy 11 and 16.5 lac shares during fy 12.
currenlty outstanding shares are 18.29 crores shares of rs 1 each.
company has again announced a buy back program in may 12, worth rs 50 crores at a max price of 110 per share.
max no of shares in buyback will be 62.5 lac whereas minimum no of shares could be 15.62 lacs.
this is a lynch type of stock where management seems to be doing the right thing with the cash on books by constantly buying back shares.
investment theme
once the company starts achieving good growth this stock could offer bumper returns and currently there seems to be very little downward risk.
Hitesh, At last you’ve picked up this stock. Has been languishing 75-85 levels for past 1 year. How does it compare with Unichem laboratories and Ajanta pharma in pharma product portfolio. I believe FDC is predominantly a domestic pharma play. Iam not sure if it has any exports. Are there are any growth plans coming ahead from the management for pushing sales and profits apart from buybacks. Because a buy back increases growth only so much. Also is there any reason company is giving flat growth/degrowth for the past three years.? These points can help gain conviction and make a decent bet.Thanks.
FDC is basically a value pick with very little to lose from current levels. And that is so bcos company has not shown spectacular growth shown by ajanta or which is likely to be shown by unichem.
exports --have increased 24% in fy 12 from 70 to 86 crores. good part is that this time there was higher contribution from finished dosage form in ophthalmology and other segments which have a higher margin. there is a statement in fy 12 AR which shows company’s intent to forge a relationship with some foreign firm to market its products in exports market.
domestic market-- company has good range of products but I guess they need sales push and recently i seem to be seeing some aggressiveness in their sales efforts atleast in my segment which is derma.
they are also conducting some toxicity studies in biotech products in collobaration with an israeli company. if it suceeds there could be good potential here.
Technically there seems to be very strong base building above 75 since a long time.
This one looks like a stock for risk averse patient investors.
Bet here seems to be that good things happen to good companies.
As usual thanks for your crisp and candid reply. I did have a small position in this company, but sold it a small loss, to consolidate it into Unichem.If I can say, was mildly influenced by your conviction in unichem. But FDC is surely for a patient investor, as the stock range is between 75 and 85 atleast for the past one year or may be even more But what is interesting is as you say buybacks. I didn’t pay much attention to it till now. As I thought the company has already accepted it can’t grow and so doing buybacks. Now may be I will dig deep to know a bit more about this company if time and mood permits.
I briefly looked at this company few days ago…some of the good things about the company include free cash flow (above 5% of sales), dividends (ok yield and payout), brands such as electral, improving margins and buyback.
At current market cap of 1522 crores, the stock might look reasonably valued at 11.5x P/E and some might argue that 2.1x P/S is fine as well. However, assuming FCF (free cash flow) of 60 cr for FY13 (20% higher than past 4Y average of ~50 cr), the market is assuming around 25% growth in FCF for the 9 years following FY13, then a terminal growth rate of 4% and discount rate of 12%. Doesn’t it look slightly aggressive?
Also, any ideas about sales growth for the next 3-5 years? Any triggers that may push growth to 20-25% p.a.?
Purely academic doubt - what is the rationale in using 12% discount rate? Is it based on beta of the stock. FCF you mentioned is free cash flow to equity I believe or did you subtract the debt after discounting free casf flow to firm?
Mumbai based FDC is today a Rs7bn company, known for its ‘Electral’ range of Oral Rehydration Salts - ORS and Ophthalmic formulations.
With 7 manufacturing facilities (3 in Goa and 1 each in Roha, Waluj, Nashik and Baddi) and with Goa and Waluj facilities approved by the US FDA & UK MHRA, we believe that FDC’s international operations which presently account for just 12% of its revenues present lucrative out-licencing opportunities in the Ophthalmic space.
What went wrong in FY’12?..
The company had a flat FY’12 with hardly any growth in top-line or bottom-line even though the domestic pharmaceutical industry grew at a healthy rate of 16%. Higher attrition of field employees coupled with higher salaries impacted profits
The story ahead…
Unlike many of its peers in the industry FDC’s working capital or cash conversion cycle is virtually zero in number of days and it enjoys a lucrative 20% PBT margin in its core pharmaceutical business without considering the 10% return it earns on treasury operations from its cash chest of Rs2.5bn.
Considering the attrition levels in the industry and the fact that new medical representatives will have a lead time in turning productive, we would like to bet on this company although its domestic operations at Rs6bn is still a miniscule 1% of the total pharmaceutical market in India.
Trading at twice price to book and twice market capitalization to revenues FDC at 10xFY’13E earnings is a virtually debt free company paying 30% of its post tax profit as dividend and is regularly undertaking share buy-backs to enhance value for its stakeholders.
We believe markets are ignoring the predictability of free cashflows with a superior margin profile which is virtually in line with FMCG companies. We recommend a Buy on FDC with a one year price target of Rs120.
FCF in the calculations is operating cash flow less capex and as such, FCF to the firm. For quick and dirty calculations, I have assumed net debt to be nil.
**Discount rate is one of the variables in addition to FCF growth rate. To get a feel of how the market is thinking about the future growth, I assumed a discount rate of 12%, and the corresponding figure for FCF growth from calculations comes out to be 25%. Of course for a lower discount rate (say 9%), implied FCF growth rate is ~15% but then I don’t think 9% discount rate makes sense. I would want slightly higher equity risk premium in this case but at the same time won’t assume it at 15%, which looks higher given the brand name, free cash flows, and dividend yield. So, assumed something in the middle. I am sure there are more scenarios that are possible.
**
Bet here is that when there is sectoral bull run, the laggards are the last to run and often the fastest to run.
Downside protection is the big plus in this company.
What the markets seem to be expecting from this company is a no growth scenario. But seeing the aggressiveness in marketing by their Medical reps, I think company can grow very well if the sales push is well directed.
They already have the products in various segments to achieve good growth.
Good set of results. Considering today is the ex-date for dividend of 2/share, the stock could have gone higher had it not been an ex-date today. Insignificant for long term though.
The bse website mentions ex-dividend date as 6th aug only…8th aug is the record date. (usually, ex-date is on T-2 in India, T being the record date) So, today onwards, the stock is ex-divdend.
as on sep 12, current investments of 285 crores+non current inv of 100 crores plus cash of 25 crores amounts to a total of 410 crores out of a total market cap of 1600 crores.
FDC up around 10% today with huge volumes. according to a small announcement on cnbc, there are rumours of the chandavarkar family contemplating stake sale to the tune of 66-67% in the company.
This always was a classical case of a company with a great balance sheet and good distribution network and products, not going anywhere-- ideal for takeover.
If the stake sale happens I think there could be better prices ahead. Economic times has calculated the valuations of the company at around 3600-3700 crores which is twice the current market cap.
But what is interesting is as you say buybacks. I didn’t pay much attention to it till now. As I thought the company has already accepted it can’t grow and so doing buybacks. Now may be I will dig deep to know a bit more about this company if time and mood permits.