Poly Medicure - at an inflection point!

Hi Guys,

Meeting with Poly Medicure Senior Management coming up in 2 weeks.

Please fire away your questions and help us collate a good set of questions - and make the most of the opportunity.

Rgds

Donald

Stock price of PolyMedicure has been doing really well and has crossed 400 levels today!

If one looks at the Sept nos closely (i.e… removes the forex losses), the co has done superbly and is going to the next level. If they are to maintain the current margins and continue growing at 20-25%, a lot of re-rating is still possible.

Hi Donald,

Where to find the questions suggested by fellow boarders for posing to Poly Medicure management ?

Regards

Amey

Hi Amey,

If Boarders had posed questions, they would be on the Forum:) on this thread only.

However Pratyush/Ayush had prepared a set of questions, and we did meet Poly Medicure.

This needs to be transcribed form our Notes. I have slipped up majorly on updating on most of the companies.

Allow me to set up a schedule for Q&A updates next week.

-Donald

Hi Guys,

Poly Medicure Management Q&AOct 16, 2012 updated.

Even though the stock has run up a lot, we should take this company seriously. If it can sustain margins at current levels and keep growing at 20-25%, this company is likely to do very well.

-Donald

4 Likes

Hi Donald,

Do you suggest taking position at Poly Medicure at CMP.

Thank you, Donald. There are no major surprises from the management. I wish they had more success in penetrating US market. The recent spurt in the price due to promoters buying from open market. It has been part of Portfolio for the last two years, and would continue to be probably for another five years.

Subash - This is a long term bet. Medical disposables industry has better Business Quality. The company is onto some good things (Safety Cannula) and has huge untapped opportunities before it, starting to see global success, and is becoming more efficient. I will revert back with some numbers/projections. One can consider accumulating on dips. Valuations & Margin of Safety can differ from person to person.

Ramana - US market success will come in the next 2 years a) Safety Cannula contract and b) their own basket of products being introduced. I agree with you, this should be part of long term bet.

I just read the Q&A and then the previous Q&A.

They seemed very optimistic of 30% growth, which is now tempered down to 20-25%.

What could be the reason for this?

Though the revenue growth would be lower, we can expect increase in bottomline growth due to non hedging of forex.

guys, reading through the management Q&A, it says company was incurring 3 cr/month loss due to this forex hedge. this means36 crs per annum pre-tax or 25 cr post-tax added to bottomline of the company. I see that company reported 6.5cr NP for H1, annualizing that and adding this fx loss, company would report 38cr NP which is almost 35 EPS and the stock is trading at 11 PE. is this correct?

Hi Donald,

Can you please explain this point in mgmt Q&A little more from your experience.

"You see last 2 quarters, US$ - Rupee has been at ~52-57 levels. As per our derivative contracts, delivery was at 40-to the US$. Hence the big losses. "

delivery at 40 ? is it normal ? We have not seen 40 levels in a long time ? and most of other companies which have reported hedging loss are reporting to have hedged at 52 levels (like eClerx, Mayur ?). So, what’s happening here on the hedging front ?

Regards

Raja

Hi Raj,

I am not an expert; there will be many knowlegable folks on ValuePickr to comment on this aspect. (Guys, please do comment). Here is what I think had happened.

You will remember back In 2007, there was a time when the outlook on the $-Rupee rate was totally southward. FII Inflows were huge, Current accound and Fiscal Deficits were very managable, and the hype in our markets was huge.

Most folks thought $ would go down to Rs 35 a $. Instead of simple one year forwards to protect margins, many exporters fell into the speculation trap of taking a call on where Rupee-$ would be 6 months to a year down the line. Many signed on multi-year contracts…such was the bullishness/speculation on the rupee! Ofcourse Bankers are to be faulted, they peddled and oversold a speculative product.

I remember I too had totally sold off my old dollar savings…so convinced was everybody of the India story:)…that $ will continue sliding against the Rupee…so cant really blame Poly.

In Poly’s case their contracts were roughly for Rs 40 to a $ (as mentioned by Mgmt); and to compound things I believe they had multi-year sequential contracts running …the last due was in 2012.

Post the 2008 meltdown, Rupee-$ took the entirely opposite route, and hence the troubles for anyone who had entered into complex specualtive contracts, rather than simple 1 year forwards which are designed to protect margins at current levels. Speculative contracts were aimed at windfall gains. This was not Forex Management, this was pure “Greed”.

Things became all the more worse as Rupee-$ crossed 50…went all the way 55…to 57…and back to 55!

-Donald

2 Likes

Enclosed below are my projections for Poly Medicure for the next 12-18 months.

Disc: I have bought small quantity, and plan to accummulate on dips
Poly medicure 2007 2008 2009 2010 2011 2012 6yr CAGR 2013E 12m Fwd Best Case 12m Fwd Worst Case 2014E Best Case 2014E Worst Case
Growth
4.10% 27.18% 21.01% 24.75% 23.13%
24%

25.00% 25.00%
Total Sales 84.86 88.34 112.35 135.96 169.61 208.84 19.74% 258.84 276.87 276.87 323.55 323.55













EBITDA 17.09 12.36 28.23 33.98 39.19 45.77 21.78% 54.32 74.75 69.22 90.60 84.12
EBITDA Margins 20.14% 13.99% 25.13% 24.99% 23.11% 21.92%
20.99% 27.00% 25.00% 28.00% 26.00%
Depreciation 3.92 5.56 6.46 7.07 8.59 9.96
11.82 12.64 12.64 14.78 14.78
Depreciation/Sales 4.62% 6.29% 5.75% 5.20% 5.06% 4.77%
4.57% 4.57% 4.57% 4.57% 4.57%
EBIT 13.17 6.80 21.77 26.91 30.60 35.81
42.50 62.11 56.57 75.82 69.35
Interest 2.76 4.34 5.46 4.78 5.42 6.93
6.54 6.99 6.99 8.17 8.17
Interest/Sales 3.25% 4.91% 4.86% 3.52% 3.20% 3.32%
2.53% 2.53% 2.53% 2.53% 2.53%
PBT 10.41 2.46 16.31 22.13 25.18 28.88 22.64% 35.96 55.12 49.58 67.65 61.17
Taxes 2.19 0.41 0.94 1.97 2.26 9.62
11.87 18.19 16.36 22.32 20.19
Tax rate 21.04% 16.67% 5.76% 8.90% 8.98% 33.31%
33.00% 33.00% 33.00% 33.00% 33.00%
Reprted PAT 8.27 7.92 5.93 16.43 21.69 19.26 18.42% 24.09 36.93 33.22 45.32 40.99
Net margins 9.75% 8.97% 5.28% 12.08% 12.79% 9.22%
9.31% 13.34% 12.00% 14.01% 12.67%
# of Shares 0.55063 0.55063 0.55063 0.55063 1.10125 1.10125
1.10125 1.10125 1.10125 1.10125 1.10125
EPS 15.02 14.38 10.77 29.84 19.70 17.49
21.88 33.53 30.16 41.16 37.22
Adjusted EPS 7.51 7.19 5.38 14.92 19.70 17.49 18.42% 21.88 33.53 30.16 41.16 37.22
EPS growth
-4.23% -25.13% 177.07% 32.01% -11.20%
25.10% 53.27% 37.87% 88.11% 70.11%
P/E



20.31 22.87
18.28 11.93 13.26 9.72 10.75
P/Sales



2.60 2.11
1.70 1.59 1.59 1.36 1.36
P/Book




4.74
3.90 3.90 3.90 2.92 2.99
EV/EBITDA




10.12
8.85



Dividend Yield




0.75%
0.94%

1.65% 1.49%

Hemant,

Probably what you surmise is the reason the stock has run up so much:).

My projections show if this is the situation indeed, then the stock may be available 12-13x 1 year forward, or 10-11x FY14E. This is the reason Ayush always tells me to look/project 12 months ahead.

This needs watching. If indeed all Forex losses are behind them, Q3 results should show PAT levels of 8-9 Crs.

-Donald

Hi Hemant,

Yes, this is the key thing. The current margins seem to be sustainable and if repeated along with 20-25%, stock should do very well even from here.

With the resolution of hedging – last payment done on 15th Oct 12, the stock could be one to watch closely.

I think the last impact of the forex loss may be felt in dec quarter because according to management the payment was done on 15 Oct 2012, and this will probably be reflected in dec qtr results. So the march 2013 qtr onwards we may begin to see great results from the company.

looks like an excellent stock to accumulate gradually over next six months.

So if everyone is agreeing about the positives in the coming months, what are the downsides? What are the risks?

a) Like Hitesh says, there still might be some impact of the last tranche payment made that will reflect in Q3

b) They had forex loan of ~19.34 Cr outstanding as on March 2012. Some M2M losses may apply if Rupee depreciates further. Besides the hedging on 40% of Net Outstandings

What else are the risks?? Being a natural optimist, I can’t find much??

-Donald

1 Like

1). Expansion will finance through internal accruals and debt. What would be the impact of interest due to debt on financials? (Operational)

2). They always talk of good margins on Safety IV Cannulae. I think this one of their flag ship products. What is their success on other products and margins? In the initial days they were optimistic about other products in the offing, but have not heard much about it later. I am a little worried about of the success of new product launches (strategic)

3). Did not see much in expansion in US market after FDI approval of their manufacturing facilities. Somehow, I feel they are not well prepared for US launch. I do understand it is a difficult market to penetrate. (Operational)

4). They may need to focus on domestic market in near future considering the size of the market. Does it impact the margins? How are they going to handle it )- tie up with hospitals and clinics, government contracts, etc.? There will be a major allocation of funds to education and health by Government (Strategic)

5). In one of the interviews, they clearly mentioned the reasons why they don’t want to make needles. Now, they are making needles themselves. Need to understand the reason for the change of course. (Operational)

6). If they want to thrive, they may need to be recognized as one stop shop for many of medical disposable products, I don’t see that happening in near future. Either they have to become a big fish to survive, or they will be swallowed by big fish like Braun. I personally as an investor want them to become a big fish (Strategic)

I consider the company is very good considering product segment it is in. However, I think it needs to improve on its operational aspect.

Thanks Donald,Ayush,Hitesh for your inputs.

I am really looking for some more help on this forex angle :frowning:

The questions in my mind are:

1). When the company says they have hedged at 40, Does this mean, for each dollar of revenue earned in last few years, they are getting in handonly 40 Rs. and reporting the same(in rs) in the results ? If that is correct, it will mean, once the hedging contract is over, they can expect to get current market rates for each $ of their revenue (say 52) ? and accordingly revenue will show a increase to that extent.

2). Or is it the other way, revenues are always reported at current market rate(like say rate prevailing at end of quarter) and the loss/gain due to hedging is reported under the head of other income(loss/gain). At least that’s what i could make from the Oct’12 eClerx presentation and conf call. But then am confused now, because i don’t find the supposed 9 cr. loss figure that’s quoted in mgmt Q&A in the other income nos. of poly medicure. What am i missing here. Do different companies have different way of reporting the hedging profit.losses ?

3). Any suggested reading to get more clarity on this accounting/reporting aspect ?

I remember reading a clarification note on hedging from Abhishek sometime back in some thread, but can’t find it now. Also, If i recall right, it didn’t address the accounting part :

Regards

Raja

Disc: Took a starter position last week and might add more both on ups and downs!

Hi Hitesh bhai,

As per notes to acs of Sept 12 results, just 66 lac rupees is left to be amortized on the forex losses.

From myobservation, the stock has been in very very strong hands and is quite illiquid despite being a 400+Cr market cap company. So there is not much point of trying to time the stock if one is convinced.

Ayush