Poly Medicure - at an inflection point!

Stock Opportunities Not-so-Hidden Gems
41

Hi Ramana,

Answering your queries:

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

As of now the company is generating good amount of free cash flows (about 25-30 Cr pa) and its not a very heavy capex co. So I don’t think they will undertake lot of debt going forward. Infact I expect the interest cost to remain at current levels.

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)

Yes, this is what I also want to see i.e… Polymed to grow into other products too. Offlate, they did get good success in bloodbags, tubes etc. Medical disposables is a huge field and if they can attain leadership in other areas too, this co can go a long long way. May be they should acquire some cos to gain access to new products.

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)

Yes, US is the big market they shud target and being the first co in India to get USFDA approval they should have been quick. However, what i learnt was that they had been working with a US co for sometime but things got delayed due to product designing etc. They aim to penetrate this market in coming 1 year.

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)

Yes, our domestic markets have huge potential. They used to talk about domestic focus and setting up of depots in their annual report.

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)

I think in interviews they have talked about not making disposable syringes…which is quite sensible. They went for backwardintegrationand adopted someJapanesetechnology. Now they just sell the excess production.

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)

Yes, i also want to see them grow independently and build their product range. They do talk about the same. Lets see how things develop.

2 Likes
42

Hi Raj,

Your point no 2 is partially right. They have been providing for the forex losses when the contract are getting completed/closed and the same is being shown under other expenditure. The amount of losses have been disclosed in notes to acs.

43

hi ayush,

this does look interesting after the resolution of forex issues. do you think revenue growth of 20-25% would translate into a much higher profit growth due to operating leverage? also, what PE would you think as fair value for polymedicure?

44

Looking at what happened to Opto Circuits (although inorganic growth, that too debt funded vs. organic growth here) the biggest dent with US sales would be - Working Capital and Free Cash flows.

from what I see here http://www.screener.in/company/?q=531768the export %age of revenue has dented from 72% to present 58% on an increased base clearly buoyed by growing domestic sales. However I would like to have a clear picture on what would be exports as %age of sales over say FY13-FY18 factoring in a staggered entry into US.

The US medicare industry is quite complex with the network of gateways (GPOs, PPOs, PBMs). Govt. aid to hospitals through state funded Medicare/Medicaid plans etc. What happens in this is the hospital payments (the main bulk consumers) gets tied up. This on one hand dents cash collection and increases working capital requirements. Hence the second item to be seen would be WC as %age of sales at present and over FY13-FY18 possible projections.

At the end of the day, it is the FCF that matters the most. We have seen what markets can do (Opto trading at 5x trailing) once your cash flows are in trouble. Looking forward for more views and comments in this regard.

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Thanks for your guidance Ayush. That’s a good learning for me, to read through the notes to acc. carefully :slight_smile:

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@hemant: I think for a company like Polymedicure, market can give very high PE ratios too. Reasons - its a very good business with long term sustainability, brand andintellectualproperty. The co seems to be on course to deliver operating profits of 27-28% and net profit margins of 15% and i think such profitabilities are rare.

@Rudra: I don’t think they are entering the US markets directly. They would be tying up with a US co and doing production for them. So the negative is that they won’t get extra-ordinary margins but at the same time it will keep the cash flow in check. Historically this co has been very careful on working capital and this is point we liked the most.

2 Likes
47

Hi Ayush,

I can’t make the case for Net Margins going to 15% levels. I can see 12-13% levels.

The company is incurring 25 Cr for Jaipur SEZ and other locations capacity utilisation is at peak. So in FY13 & 14 they have to make higher capex (100 cr plans over next 1.5 years? as announced by Management), else growth will suffer.

Are you projecting little or no debt increase?

-Donald

48

Hi Donald,

I was trying some forward projections and for next 12 months, based on existing growth rate of about 20%, I feel they can do 270-275 Cr turnover and post a NP of 39-40 Cr…thus resulting into an NP margin of 14-15%.

The 100 Cr capex you are considering…should happen by FY14-15 and help them in scaling to 400-450 Cr turnover. There was some article which talked about their aim of doubling their turnover by 2015 (unable to locate the same)

Ayush

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Note from HDFC:

Poly Medicure Ltd (PML) manufactures medical devices and has over 90
products via its 3 plants â 2 at Faridabad and 1 at Haridwar. Unit 2 at
Faridabad (accounts for 60% of the companyâs total capacity) is an
export-oriented unit (EOU) and has USFDA approval (received in Dec 2010).
The company is also in the process of setting up a plant at Jaipur and
debottlenecking its current capacities. With the new plant and with
improved utilization, the company expects to increase volumes by ~20%. IV
Cannulae (account for ~45% of sales by value), blood bags (~10% of sales by
value) and IV Sets (~10% of sales by value) are PMLâs chief products.

The healthcare industry has excellent prospects and is drawing a lot of
attention in the form of MNC and FII investments. Recent stake sales in
Ahlcon and Claris throw light on the possibility of foreign interest in
PML. The company has excellent operating margins and net margins are
expected to improve drastically as the currency curse borne by the company
(due to certain derivative contracts) has finally come to an end. Good
margins and returns result in good financial ratios for PML. Additionally,
the company operates in an industry with high entry barriers due to strict
regulation and lengthy approval processes.

Raw material prices and forex fluctuation (as ~70% of revenue is from
exports) are major concerns and the relatively simple technology could
increase competition over medium term. Poor subsidiary performance,
completion of tax benefits for EOU and the shortage of skilled labour raise
concerns as well. In case PML is unable to ramp up production as expected
or any delays in capacity addition could lead to lower than anticipated
growth in revenues and profits.

We believe PMLâs stock is valued attractively given the companyâs growth
momentum, broad product range and high margins and return ratios. We feel
investors could buy the stock at the CMP of Rs. 459.7 and add on dips to
Rs. 439 for sequential targets of Rs. 513 (14x FY14E EPS) and Rs. 549 (15x
FY14E EPS). In our valuations we have not considered the effect of
subsidiaries due to the insignificant impact on financials and lack of
clarity.

50

Poly Medicure Ltd has informed BSE that the Company have been take effective steps to set up Special Economic Zone unit at Jaipur for which it had acquired Industrial Plot area 16789.00 Square mtrs. The total investment for this new manufacturing unit will be to the tune of INR 33 crores. The proposed project likely to go on stream by Quarter 3 of the Financial Year 2013-14.

51

I was having a look at polymed.

What I have noticed, in all the ARs they mentioned the Capacity and the units produced /soldexcept the latest one (2011-12). Though the started indicating the component based sales in notes but not the units. Any reason why they changed that and how to get that information ?

Initiated position in poly med.

52

http:// http://lite.epaper.timesofindia.com/getpage.aspx?edlabel=ETD&pubLabel=ET&pageid=15&mydateHid=08-02-2013

an interesting article on the growth opportunity of india’s medical devices industry.

53

http://www.bseindia.com/xml-data/corpfiling/AttachLive/Poly_Medicure_Ltd1_090213_Rst.pdf

results are out. top line flat, net profit more than doubled over Q2. eps 7.5 for this quarter

54

hi ayush,

any views on the poly medicure’s results? the topline doesn’t seem great. its flat QoQ but up 13% YoY. the NPM seems to be at the level we expected 13.5% although the results still included a forex loss of 95.5 lac ruppes because the forex contract closed only in mid october.

55

Hi Hemant,

In the case of Poly Medicure, its normal to see periods of no major growth on QoQ basis but every few quarters they go to next level of turnover and end up delivering 20-25% growth

Ayush

1 Like
56

Hi Friends

Liked the company, but its trading at PE of 25+ with PEG of 1.35. Looks like valuations have eevrything factored in. I dont have any holding in it, do you guys think its god buy at current price?

57

Hi Saurabh,

If you go through the entire thread u will realise that PE is high as there were forex derivative losses in the past. If u remove that and recheck PE it is much lower. Forex derivative losses accounted for 2/3 crore loss per month as per management.

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Regards

58

HDFC has recommended a exit in thier latest techno funda call . This is purely because the small/mid caps are getting hammered in the market .Though they remain confident on growth prospects of the company

http://www.valuenotes.com/uploads/article_pdf/HDFC%20Securities_Poly%20Medicure_25th%20Feb%202013.pdf

The report also gives some insight on the lower QoQ , they say its due to labour shortages in thier faridabad .

59

News about Promoter Shareholder’s land deals with Vadra & Co.

What could be the impact on Poly Medicure?

60

Thanks Akbar for the news, I didn’t like it much. I don’t have any insights into how it might impact the company or it’s stock price. So, I made the exit. Might enter again after the storm has passed even if it’s at a slight higher price.

With parliament getting stalled over vadra’s land dealing issue, things don’t look quite ok. As a small investor, i thought it prudent to stay away for the moment. Had a 4% allocation which is now down to 0.

Link: http://www.business-standard.com/article/economy-policy/poly-medicure-investors-bought-470-acre-gajaner-land-from-vadra-firms-113031100204_1.html