Poly Medicure - at an inflection point!

Stock Opportunities Not-so-Hidden Gems
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I am surprised to find we never created a thread on Poly Medicure at ValuePickr!

This has been a favourite company of Ayush Mittal . This is what he had to say about Poly Medicure at his blog in Mar 2010.

http://dalal-street.in/poly-medicure/

Poly Medicureisone of our favouritesmall cap stock whichhas carved out a nichefor itself and has grown well over the last few years.

The company is theone of the biggest exporter of IV Safety Cannulae and other healthcare disposable products. This business segment is always growing and with development of better medical facilities, this segment should grow faster.

Few worthy points:

  • The company has grown at a**CAGR (Compounded annual growth rate) of 30.75%**over last 10 years. (From turnover of 10 Cr in FY 2000 to 112.22 Cr turnover in FY 2009)
  • The company is expected to grow at 20% YOY (Year on year) for next 2-3 years. This year the company is expected to do a turnover of 135 Cr with a net profit of 15 Cr, thus implying an EPS of 27.
  • TheCMP of 200 discounts the immediate EPS of 27 by just 7.5 times.

The last two quarters have been very good due to the backward integration efforts of the company done in the last few years and hence the company may be able to sustain operating margins around 20%.

Recent Developments

  • Thecompany has won series of patent infringement cases against major B Braun, after which the company is free to sell the advanced IV Safety Cannulae with the inbuild safety feature (http://www.expresshealthcare.in/201002/market26.shtml). This product has potential to sell at a very remunerative price in the developed nations.
  • The company has been strengthening its sales network on the domestic front and tying up with major hospitals.
  • The company is looking to expand its capacities and targets to double turnover in next 3 years. For they same they are also looking to put up a new factory.

Challenges:

Being a**high volume low price product, the scaling up of the business is not easy.**The company has been trying to develop new products to overcome the same.

Here is a company with strong financials, good business model, high margins, good return on equity, good cash flow yet available at less than 8 PE.

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Poly Medicure is at an inflection point. Successful backward integration and Product Innovations like the Safety IV Cannulae has brought it to the attention of major OEMS in developed markets.

Poly Medicure stock story updated. Please familiarise yourselves with the business, its potential and the challenges ahead. Do you think the upsides are all captured in the current price?

Please carry forward the discussions.

-Donald

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I went through the stock story for polymedicure. It looks an excellent stock to keep on the radar during declines for accumulation.

overhand of forex derivatives does remain.

at cmp of around 290, most of the positives seem to be built into the price.

Important thing to see is how the company fares on a higher base now that the explosive growth phase on lower base has occured.

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Hi, it had clocked177% growth in NPinFY 2010. But the q-3 growth in NP was less than 9%. Looks like, as Hitesh mentioned, the com may bestrugling to maintain the growth.The stockpricehas increased 15 times in 2 years! Unless there is some visibility of new products/markets it could be difficult to see a good upside from this level.

Ayush had recommended this stock at levels of Rs 100in his blog.

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Like Hitesh mentioned, the first objective is to keep a good stock as Poly Medicure, firmly on the radar.

Next, Take into account recent developments like

1). USFDA approval for its Faridabad plant for all products. Thats a huge development if you think carefully about it

2). Safety IV Cannualae - post the successful patent challenge -thy are possibly only the 2nd company in the world or among the very few that can manufacture that product, especially for the US market, also because of 1 above.

3). The further expansions the company is undertaking - facilities are being created with Pre-fab assemblers from China -there seems to be a hurry - possible reason is the company has sealed/on the verge of sealing major deals from US based OEMS, based on 1 & 2 above

Surprisingly there has not been much talk by the company/media about these developments. Poly Medicure in my opinion is in a much stronger position today -than it was ever in last 2 years. The visibility for the next 2-3 years is very good, if we choose to focus on these new developments (USFDA is a Dec 2010 development by the way)

Valuation is a difficult game!

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I had taken a good position in polymed in 2009-10 and also wrote an article on it post its usfda approval for few of its products in 2009. Attached below is the article…

Poly Medicure - A Multibagger in the Making

Industry â Healthcare â Medical Disposables

BSE Code â 531768
Current Price â Rs. 145
Target Price â Rs. 310
Time Frame â Medium Term

Equity Capital â 5.50 cr.
Promoter Holding â 49 %

FY09 Revenue â 112.22 cr.
FY09 Operating Profit â 10.79 cr.
FY09 Net Profit â 5.92 cr.
FY09 EPS â 10.76

FY10 1st Half Revenue â 62.49 cr.
FY10 1st Half Operating Profit â 8.55 cr.
FY10 1st Half Net Profit â 6.32 cr.
FY10 1st Half EPS â 11.49
FY10 Annualised EPS â 22.98

Investment Rationale â

Background :

Established in 1995, Poly Medicure today counts amongst worldâs leading medical disposables manufacturer with a core focus on R&D and innovation. Research efforts put-in by the company in last several years has led to it filing more than 70 patents out of which it has already got 10 in its kitty with 2 being in worldâs largest medical disposables market viz., USA. Polymed has state-of-the-art manufacturing plants in Haridwar, Jaipur & Faridabad in India and one in China and one joint venture in Egypt. It exports nearly 34 % of its produce to Europe while Indian market contributes 25 % to Polymedâs sales. It exports its products to 50 countries currently with Europe being the major market at present.

Trigger :

Business at its Inflexion Point :

The efforts Polymed has put-in since last several years and the aggressive approach Polymedâs management is now pursuing promises the start of golden phase for Polymed staring from current FY10. The efforts which we are talking are the R&D efforts because of which Polymed has, since last 4 years, constantly launched 10 new innovative products every year and has filed for more than 70 patents out of which 10 it has already got with 2 being in USA. The main fruit of these efforts has come in the form of USFDA approval in June 2009 for launch of 5 of Polymedâs products in US market which happens to be the largest and most fruitful market for medical disposables manufacturers. Out of these 5 products which have got approval, 2 products are the one which had got the patent in USA. Hence, launch of these 2 products will mean healthy margin for Polymed.

Apart from this, Polymed had launched 2 niche products in Indian market viz., blood collection tubes & insulin syringes in May 2009. Both the products command a healthy domestic market and Polymed expects to sell 25 million blood collection tubes and 30 million insulin syringes in FY10 itself.

To add, Polymed has started aggressive marketing efforts in domestic market by opening sales offices in Hyderabad, Chennai & Kolkata. The company is also in active discussion with major hospital groups for co-branded products and a breakthrough with a leading Indian Hospital Chain is expected shortly. In addition, Polymed is also focusing on providing disposable devices to healthcare programmes in Maharashtra, Rajasthan & Gujarat. Within a couple of years, management expects domestic market to contribute 50 % of its sales up from 25 % it contributes at present.

Financials â

For FY09, Polymed posted a topline of 112 cr. and a bottomline of 5.92 cr. which translates into an EPS of Rs. 10.76. For the 1st Half of FY10 Polymed has posted a topline of 62.49 cr. and a bottomline of 6.32 cr. which translates into a half yearly EPS of Rs. 11.49 and an annualised EPS of Rs. 22.98. By Conservative estimates, Polymed is likely to post a topline of Rs. 132 cr. and a bottomline of 11.5 cr. for FY10 which translates into FY10 EPS of Rs.20.90. In our FY10 estimates, we have included only March2010 qrtr. sales of products to be launched in USA.

For FY11, Polymed is expected to post a topline of 186 cr. with bottomline expected to zoom to Rs. 20.40 cr. which will translate into FY11 EPS of Rs. 37. These are only conservative estimates as from 3 out of 5 USFDA approved products viz., IV Catheter, Safety Scalp Vein Set and Safety Infusion Set, Polymed expects to rake in Rs. 50 cr. sales every year. The potential of Polymedâs major product viz., IV Catheter can be judged from the fact that B. Braun AG is going all out to restrict Polymed from selling this product because it has the potential to significantly affect B. Braunâs own product sales as Polymedâs IV Catheter is far more superior and competitive in pricing than B. Braunâs. B. Braun first tried to restrain Polymed in India but it failed to do so as Indian court gave a clean chit to Polymed. Hence, B. Braun did it in its own teritary by restraining Polymed in December 2009 from marketing its IV Catheter in Germany. This restrainment is expected to affect only Germany sales of Polymed and is not expected to have any major impact on its sales in US and other countries.

Conclusion :

Poly Medicure is a decent medium to long term bet if we consider its business, its financials and recent developments. In current market which is at a 22 month high, an investor needs to look at two angles â First, not to lose the opportunity of multiplying the money by remaining in cash and missing the rally - & Second, not to invest in those stories which seem fully priced at the moment and so have the potential to correct significantly if a correction sets in.

Hence, if we look at both the angles then Poly Medicure seems to be the safest bet as :

(1) It is operating in a segment which is recession-proof

(2) its business is at an inflexion point and one gains most by investing in stories which are on the verge of reaping rewards of past efforts

(3) recent developments like USFDA approval, opening of sales offices, focus on domestic as well as international makets, etc. all give safety to future financial growth of the company

(4) valuations are very cheap as Polymedâs closest Indian peer (not strictly- as no other listed company is into medical disposables) Opto Circuits is quoting at a 17+ PE while Polymed is available at a PE of 6.9 based of FY10 EPS estimates and at a PE of just 3.9 based on FY11 conservative estimates. This valuation is pretty cheap in current market scenario which calls for a significant rerating of Poly Medicure soon

Although currently i don’t track the co. actively as only having a token position in it but as far as my understanding goes, management has done a great bit on safety iv canula where it is directly competing with braun, but on sales side co. has a long way to go. It has in its strides a not-so-succesfulUS acquisition…as also donald, i think as far as my info goes (correct me if i am wrong)polymed has won patent case in India only.

Inspite of all these, there is no doubt that polymed is a great stock to keep on radar but at current price i feel upside is not much unless some huge trigger is awaiting that we are not aware of… Its a great buy on declines as also it can command a rating of concept stock once the sales side is corrected by the management… it will be great donald if u can catch with the management and extract if there is anything interesting as if its so it will get rerated very fast and with much severity.

Rgds.

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Mahesh,

Thanks for your inputs. Some of the data there are mostly from published reports in 2009. Those initiatives have not taken off despite several announcements by teh company like blood bags & pathology business has gone nowhere.

The patents are not of much use - they relate to a particular size of the product say IV Cannualae, another mfrer cannot produce the same size -so at best it protects a particular order from a hospital/OEM. These patents curiously (unlike the usual) are not for a manufacturing process/technology that others cant copy etc.

for info…

We (Myself & Ayush) have had one sitting with Management in Feb last, unfortunately this was an impromptu meeting (my first brush with the company) and I was not armed with a regular set of questions and so not in a position to publish Management Q&A. Reportedly there are big developments which may reflect in FY12 performance. we will like to do a repeat visit sometime in Q2 FY12, perhaps, to take stock.

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Donald, thanks for posting the details on Poly Medicure and bringing up the discussion.

Yes, the picture/visibility of the co is now stronger as compared to a year or two back. Major trigger for the same has been:

USFDA approval - This could be a major game changer for the company. US market is huge and will give much higher margins. If the co is able to scale up here…the co is going to the next size. Another point to note is - In US only safety medical devices are sold. This was patented product of B Braun and now Polymed has the rights to sell this product.

The company has a major lead in this product segment and is now the strongest player. Its amazing the way the co has scaled up in last few years. Add to it the way they have been honest and have created shareholder wealth.

Regards,

Ayush

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Hi Guys,

This time we could meet Poly Medicure Management with a structured questionnaire. Thanks are due (no surprises) to Ayush Mittal again, who not only did most of the work but boosted my energy levels(I was in Delhi in connection with some other work!)at the end of a hard days work(leaving me with an editors job, mostly), to do justice to the opportunity!

When will we have more clones of Ayush?More show of hands, please:)

Poly Medicure management Q&A, July 21, 2011 is shared for everyone’s benefit. This is an excellent company with a decent track record, now at an Inflexion point!

Maybe most of it is priced-in, may be not!

What’s your call? Please share your comments and take the discussion forward.

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Thank you very much for sharing the information.I would say it is a Caterpillar in MetamorphosisaÂŹ ready to become a butterfly. Following link in Business & Economy magazine made me to invest in the company when it was really difficult to obtain any information on the company to make any informed decision. Just want to share for the benefit of other members. Please note there are some typos in the article.

http://www.businessandeconomy.org/24062010/storyd.asp?sid=5335&pageno=1

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I think the stock price will take a breather unless there is positive surprise in Jun quarter.

Regarding the tax benefits. Could you please throw some light on current tax benefits that company avails, when they will they be withdrawan and effective tax rate after that? Good to know chinese facility is providing the cost advantage in sourcing the raw material.

I agree that 2011-12 is an inflection point for the company due to the expansion and entry into US market.

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Hi Donald,

Thanks for doing the great work and putting up the compilation so quickly.

@ramana Yes, this has been one excellent company. I have been tracking it from 2004-05 and it has been a wealth creator. The future is equally bright :slight_smile:

In near term, thebottom linemay not expand as fast as expected 25-30% topline growth. But after 6 months or so, bottomline should also start coming up.

Thanks for the link

Regards,

Ayush

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Great work donald and ayush again.

I went through the management Q&A and am impressed with the management vision. Few things which could be construed as risk:

1). Impact of withdrawl of tax benefits-- we need to see how well company deals with this problem by raising their margins-- one such victim seems to be vinati organics.

2). Irrational acquisition-- Typical of a fast growing company wanting to grow faster, the company talks of acquisition targets in europe and brazil etc. This is one place where many a company has faltered. examples which come to mind are suzlon, dishman pharma etc. This needs to be monitored very closely.

3). Impact of forex contracts – with the QE3 decision going one way or another, there could be a major impact on currencies worldwide and thats where smaller players tend to get hurt.

4). The impact of B-D starting its operations in a major way in Inida— I myself can vouch for the quality of B-D syringe and needles-- absolutely no one in India comes even close to the quality offered by B-D . I never use any other brand unless I dont have B-D available.This is the lesser of the evils for polymedicure bcos in Indian retail space it has practically little market.

Regarding positives i dont need to ennumerate them. Their financials and balance sheet say it all.

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Tax impact has hit the Q1 numbers significantly. Tax is 247.86 lakhs vs 85.22 lakhs in Q1Fy10 before.

Q1 2010 Q1 2011 % Growth
Sales 38.45 45.47 18.26%
Op Profit 6.04 8.81 45.86%
Net Profit 4.87 5.33 9.45%
EPS 4.42 4.84 9.50%




















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As expected tax takes its toll on margins. I see similar picture in many mid/small cap software companies where also growth expectations have been tempered down now.

Polymedicure needs to ramp up significantly in order to negate the impact of tax increase.

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I agree. tax is now almost 32%. The Company has to either significantly increase sales or increase margins. Raising prices is probably not an option the Company has. RM or other costs must be cut. With cheaper sourcing of RM from China Im not sure if price can be decreased further.

This stock can be kept in ones radar and one can enter at lower levels.

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Does someone have the last few AR’s for Poly medicure and send them my way. Thks

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Hi,

Please give me your email id, I’ll email the annual reports.

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EquityMaster has given a reco for this stock this month in Hidden Treasures.

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I don’t think we should read too much into recommendation by Equity Master. Does not mean anything much. Check out their recommendation on Allied Digital given few years ago for instance, its nearly 90% down and they still claim it to be a buy. Most of their recommendations are a hit or miss. So trust them at your own peril.

However, this is not to say that Poly Medicure is not a great company. I like it a lot and its a great company. But someone such as Equity Master should have caught it much earlier, not at current levels. I am personally invested in the company and plan to buy more on dips.

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