Gujarat Themis Biosyn Ltd - Bulk Drugs growth momentum

Stock Opportunities Untested - but worth a good look
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Intro:
https://www.screener.in/company/506879/

  • Market Cap: 290.21 Cr.
  • Current Price: 199.75
  • 52 weeks High / Low 205.00 / 31.40
  • Book Value: 29.05
  • Stock P/E: 12.26

Gujarat Themis Biosyn Limited (GTBL), located at Vapi, Gujarat, was incorporated in 1981 as a joint sector company with GIIC Ltd. and Chemosyn Ltd. (possibly NCL, Pune helped) commencing production in August, 1985 by producing Erythromycin and Erythromycin salts and formulations. The company was subsequently taken over in June 1991 by the Yuhan Group (one of the biggest South Korean pharma cos) and Pharmaceutical Business Group (India) Ltd. (PBG); a unique consortium of five competing drug companies - Themis Medicare Ltd (TML), Kopran Ltd., Anant & Co., Cadila Health Care Ltd. (Zydus) and Lyka Labs Ltd. It is being actively managed by Themis Medicare Ltd. (JV Company of Gedeon Richter Ltd, Hungary) since 2007. The company manufactures active pharmaceutical ingredients on job work basis for Lupin Ltd.

The latest results show that the company has re-classified its business from contract manufacturing to bulk drug seller.

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Collectively 3 promotor groups (Themis, Yuhan and PBG) own 75% distributed equally, the rest is public. Somehow they are the only manufacturers of Rifampicin in India. Overall seem to have large fermentation facilities to make such drugs. Now they have added anti-cholesterol Lovastatin to this.

Discovery:
I got this investment idea from @kdjolly who had posted once on valuepickr an analysis of the company. The product is used in TB multi-drug combination therapy so market is big and growing, till some new science changes the treatment.

The technology is from Korean company which has also invested in it, 25% stake. The idea is that they may replace China (whose imports may have caused the problems for this co) as source of more anti-biotics and have started looking beyond Lupin, another investor and collaborator/buyer. CAGR is quite uneven, company had early turnaround from BIFR in FY2016 technically but only acknowledged in FY2018 AR. Now it appears that it is able to deploy a strong growth strategy. How much momentum can be sustained is difficult to say, I cannot find much details on this, hence, took a small position in overall PF.

More details: :
AR 2019 has very less interesting disclosures.

Gujarat Themis, went into BIFR in 2008 under the impact of consistent losses and debt. Under the scheme of re-habilitation a lot of operating and functional changes were brought in the company. The Face Value of each share of the Company was reduced from Rs.10 to Rs. 5 and the reduction in the value of equity shares was utilized to write-off a part of accumulated losses of the Company . Themis Medicare Ltd. was inducted as co-promoter of the Company and issued 2928702 shares of FV rs 5 at 10rs each. The induction of Themis as a co-promoter brought in the much needed sting and zeal in the operations of the company. The new promoters also brought in the sole long term customer in Lupin . Lupin’s deal with GTBL changed the fortunes of the company. The contours of this deal were very lucrative for GTBL. GTBL entered into a contract with lupin to supply Rifa (with the technology know-how brought in with another co-promoter – Yuhan Corporation). Lupin gave GTBL interest-free loan for capex that was required to finish the contract. This loan from Lupin was a returnable non-interest bearing loan and was repayable against 50% of the “Conversion Charges” for each invoice raised. So, this deal was beneficial to GTBL in more than one ways. Needless, to say this contract brought in very good topline and bottomline for the company.

To the credit of GTBL, with each passing quarter the company has been improving its operating efficiency and it now has one of the best operating parameters in the industry. With announcement of the supply agreement with Lupin that started from 1st April 2015 – Mar 2018 the company got solid visibility to its earnings. This had a very positive impact on the fiscal position of the company. Since the company came out of BIFR, the company will expand to newer products. Additionally, the company is also exploring the possibility of “offshoring” some of the manufacturing of its another promoter, Yuhan Corporation. Given the already established operational efficiency of the company any increase in revenue would significantly add to the bottomline too and the company is expected to clock significant revenue and profit growth in the years to come.
From AR FY2018

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which may explain more freedom in operating decisions and general uptick in revenues since then.

Products as per cos website:
http://www.gtbl.in/products/
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Concerns:

  • Themis seem to dominate the overall management and that could be a concern given that they themselves have a chequered track-record.
  • Investor friendliness may also be an issue due to promoter domination but that may improve(?) as company scales operations. Currently they do not have even latest reports on the company website.
  • AR 2019 mentions full capacity use, but does not disclose any investments in growth, so current spurt in revenues and huge jump in margins is a mystery.

Financials:
Zero debt with high ROCE of 45% and first dividend announced in latest quarter.

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https://www.screener.in/company/506879/

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Sources: (from 2015)

Disc: 3% of PF, freshly acquired this week

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Themis making competing product to Lovastatin in its own biotech firm, might be another concern.

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Brother i have been monitoring this company for some time. Checked their AR19 and came to know that their Capacities are operating at FULL as you mentioned clearly in concerns. i could not find future triggers at present results of previous quarters have priced in stock moved from 60-70 to 200. Technically very good setup but without growth triggers this setup may be limited to 20-30% upside.Just sharing my understanding.

Disc:Not invested,Tracking

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I have a few observations on the BS and Cash Flow Statement:

  1. Gross margins are in excess of 85%, that seems very unsual.

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  2. Power and fuel costs are 20% of revenue and almost equal to raw material prices. Previous years, it was upto 40% of revenue, when they were doing Job work For such a small turnover with such huge margins, how is there so much power and fuel consumption

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  3. Although revenues have surged, look at the receivables and inventory. 70% of revenue has gone int this.

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Also, past year ARs are quite unusal. ARs don’t provide much information on what their business is, outlook, stratety risks etc

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Yeah, AR has numbers but almost zero explanation of what is going on!

Some updates:
Lovastatin is not new to the company, it was added back in 2011.
Even then company had claimed 100% capacity utilization, so they are not publicizing with their capacity increase in timely fashion, bit strange.

About your points:

  1. Yes, screener shows the latest OPM is 50%, ROCE is almost same and amongst the top 4 in Pharma industry!

  2. I read in the AR environmental/power savings section that the fermentation cooling systems have been downgraded by half to save power. Maybe fermentation reactors are power intensive, will need to check on this!

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    So they saved 110 HP, one HP is = 750 W, so they saved 82.5 KW !! About 2000 units of electricity per day (1 unit = 1 KWHr, considering 24 hr operations). 7.3 Lakh units per year (365 days). So numbers look ok!

  3. Thanks for pointing out, this is a huge portion of sales, another red flag!

Biocon started out as a fermentation company, this is the expertise of KM Shaw (and her father). No (direct) comparison here of course, but possibly promising technology. Maybe (pharma) fermentation is like this, power intensive, low RM demand, and high value-addition after time-consuming process if done right!

https://www.biocon.com/biocon_manufacture_solid.asp
Solid State Fermentation

Biocon’s foray into manufacture of food and speciality enzymes began with the commissioning of our first solid state fermentation plant in 1990. This plant was based on the conventional tray fermentation technology, also called “koji” fermentation.

https://www.biocon.com/biocon_manufacture_micro.asp
Microbial Fermentation

In 1999, we commissioned our first large scale submerged (or stirred-tank) fermenters capable of handling bacteria, yeast, fungal and actinomycete cultures. This capacity was further expanded in 2006 on our second site, Biocon Park, to cater to the anticipated additional demand for several small molecule generics such as the statins, anti-obesity products and pharmaceutical enzymes.

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I heard from some one that there is a surge in the prices of rifampicin …do you know if it’s true ? Also comparing the recieveables and inventory to the full year sales wouldn’t right as they have changed their business model after the first 2 quarters after which there was a surge in sales

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Since they are in API and mainly contract manufacturing or bulk manufacturing, it is important to understand if they have pricing power. I would look at what arrangements Lupin made with company. If they focused on just their vendor development, it is important to look for dependence on Lupin

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I have been following this company–sold a few weeks back after decent gains. The company has a good track record despite the chequered past of one of its Promoter companies. The management is taciturn. Their recent results mention that they have changed their business model from contract manufacturing to supply model. It seems that Rifampicin prices have also increased coincidently with the change in business model.

Not sure what is the contribution of the two factors in the increased margins or whether the margins are sustainable. If the margins are sustainable, it may be because the change in business model has resulted in increased capacity utilisation and/or because they have started exporting at higher margins.

The company got environmental clearance for capacity expansion in 2019 but the expected time of commencement of operations within the expanded capacity is unclear.

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Looks like you may have sold at the right time! The environmental clearance request has dates from 2017, and if it was granted sometime in 2019 as you mention then that explains the sudden bump in sales. So, going ahead there is uncertain growth, maybe.

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Indian firms depend most on China for fermentation-based APIs used in antibiotics such as tetracycline and erythromycin, and cardiovascular drugs such as pravastatin, as well as certain vitamins and paracetamol.

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From what I know, I don’t think the new capacity after expansion has commenced yet.

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Has the expansion already been finished? I think they mentioned in sept 2019 results that they would be undergoing expansion …do you know if the expansion is completed ?

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Looks like both of you are correct! I just assumed since Dec 19 results were 2x previous quarters trend, it is quite unlikely for a capacity expansion to finish so fast and start adding so much already to the top-line.

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Sir, in companies latest rating update mentioned “issuer not co-operating” do you see this as a concern/ red flag?

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This is usually a red herring, not a red flag. Usually, in my experience, in many cases it means the company does not need to raise debt.

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Do you know if the capacity expansion is complete but still not operational or the company is still undergoing expansion ? Tried reaching out to then but not able to get them on the line

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Sales increasing from 16 Cr in 2008 to 85 Cr in 2020.5 times in 12 yrs .Slow & unsteady.

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According to the annual report, the cost of raw materials consumed in FY 2019 was just 33 lakhs. This increased to 15.44 crores in FY 20. Thats a 160% increase!
Now even with a massive capacity addition and change in business model, how can this be explained?

Also the balance sheet has 3.18 crore of borrowings so they’re not debt free. This is interesting. They had a 23.6 crore profit, about 20 crore increase in receivables and inventories and a fresh debt of 3.18 crores. Something is not right or am I missing something?

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According to the annual report, the cost of raw materials consumed in FY 2019 was just 33 lakhs. This increased to 15.44 crores in FY 20. Thats a 160% increase!
Now even with a massive capacity addition and change in business model, how can this be explained?

They have mentioned that their business model has changed. Earlier they were doing the Jobber work. Thye used to get raw materials from the customer, and thus cost material was not included.
Now they are selling their products on their own, so obviously raw material cost gets reflected

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