Risks
My last post missed out on the risks, here are some. Am sure there are several more but these are important.
- There are some links to buying land from Vadra in the early part of the decade. Some promoter entities may have political links.
- Some of the entities classified as non-Promoter appear to be closely linked to Promoters, so they are very much Promoter entities in my opinion. This may let them freely trade their holdings without disclosures. Overall Promoter holdings have more or less remained stable.
- This business may be a one-hit wonder that gained greatly with IV Cannula tailwinds and may never be able to replicate that sort of growth ever again (Last 4 years are living proof for this)
- I don’t know how to value businesses, nor do I think market knows how to value businesses most of the time and my buying and allocation reflects this shortcoming of myself and mr.market. There is a good possibility that at 230 levels, we are overpaying and it may drop another 50% from here (Feb 2016 lows of 120) if there is a market meltdown. This is a worst case possibility one should be prepared for
With all that out of the way, let me put down my thoughts down on where I see tailwinds and early green shoots in this business. The company has very recently (plant was ready, late in FY19) got into Dialysis and has the following products in this therapy area.
Dialyzer (Haem-O-Flux) (Do click and see what one looks like, as we will be talking a lot about Dialyzers after this)
Safety AV/AV Fistula Needle
Haemodialysis Catheter
Blood Lines (Haem-O-Line)
Peritoneal Dialysis Set & Transfusion Set
Earlier the company had gotten into Blood Management System vertical - which is nothing but blood bags (All products in this vertical are here). Side Note: Looks like all their products are listed neatly on IndiaMart
There was considerable optimism, even in this thread on this Blood Management vertical but it did not perform well enough - Probably because the addressable market size for blood bags wasn’t big enough to start with (Global market size itself was only $279million). This is probably what lead to the stagnation in business between FY '15 - FY '19 when IV Cannula sales growth reduced. IV Cannula/Catheter market size appears to be around $5 billion and that explains how easy it was to grow in that area as a low cost player. Poly Medicure still only holds about 400 Cr or about 1% of this market size - So there is scope for further growth even in IV Cannula market as a low cost player, if they successfully fight the patent against B Braun on all markets, as it has done in Europe.
So how big is the Dialysis market then? This could pretty much make or break this investment thesis. Looks like Global dialysis market size is close to $100 billion -within this, the Dialyzer market (the disposable component), which is of interest to us, is about $10 billion and growing at about 5% CAGR. This means that the market size is even bigger than the IV Cannula market where the company continues to do well.
There is considerable information in the last one year from the company that their focus is very much within India for the Dialysis market. This looks to be driven by the National Dialysis Program and Ayushman Bharat - PMJAY. Check this and this
The company has openly welcomed Ayushman Bharat program in last year’s AR, as well as in several interviews given last year. It looks like the company may be one of the biggest beneficiaries going forward from the programme.
The govt. also looks to have removed duty on parts/raw materials for dialyzers while at the same increasing the duty on imported dialyzers, by adding a 5% health cess onto the 7.5% duty on medical devices - taking it up to 12.5%. So the company gets to manufacture dialyzers cheap, while the govt. reduces competitetive intensity from a market leader like Fresenius. So the govt. policies seem to be aligned towards its endgoal of treating more ESRD patients while encouraging local manufacturing.
The company seems to have had the foresight to utilize this opportunity back in 2018 - source.
Here are a couple of very useful articles analysing Dialysis market in India
The short summary of it - In our population of 1.2 billion, ESRD (End stage renal disease) patients, at an incidence rate of 0.3% would be about 37 lakhs- But only 55000 were getting Dialysis as of 2010 (Indian institute of Nephrology study).
It looks like Dialysis is repeat business, with the patient needing 3 sessions in a week, or about 156 sessions in a year and has to spend about 1000 per session minimum, taking the potential market size to 57k Cr. Assuming only 30% patients are aware and only 10% of those undergo dialysis, we get a immediate potential of Rs.1,700 Cr market size.
This obviously puts this treatment squarely out of the reach of most Indians - until PMJAY
It looks like under PMJAY, most claims are for dialysis. There were 4,55,155 claims for dialysis. Every year 2.2 lakh new patients with ESRD get added in India. So additional demand for dialysis per year = 3.4 Cr dialysis per year. So we have a govt. willing to support this cause and we have a market that is only growing, thanks to high incidence of Diabetes in our population (ESRD and CKD, are comorbidities of diabetes). The govt. is paying Rs.2000 per dialysis sitting which makes things very, very interesting for this market in India. As of June '19, the govt had paid out Rs.175.89 Cr for dialysis. So as outlay for Ayushman Bharat - PMJAY increases, Dialysis market could be the biggest beneficiary, along with the ESRD patients. This is still very early days though.
So to summarise, unlike the earlier foray into blood management which didn’t yield equally good results as IV Cannula (which I put down to opportunity size), the dialysis foray might be more promising due to market size, diabetic demographic and govt intentions and regulations.
Apologies if my thoughts are very unstructured. These are all thoughts I had scribbled in my research journal for this company over several days. Hopefully this will help pique your curiosity for further contributions.
Disc: I have purchased some stock around 230 levels. I am not SEBI registered advisor. I am a novice who does this as a hobby. I am bound to have made several mistakes. Please research on your own before making investment decisions. Read the risks at the top of this post several times or better yet, add some more to that list.