Sakar Healthcare - Tiny Pharma Company for promising Growth ahead

I could not find discussion for Sakar Healthcare ltd so I am starting discussion for this tiny pharma company.

  1. Sakar Healthcare Ltd established in the year 2004, Sakar is engaged in manufacturing of Pharmaceutical products providing Liquid Orals, Cephalosporin Tablet, Capsule, Dry Powder Syrup, Dry Powder Injections, Liquid Injectables (SVP) in Ampoules and Vials & Lyophilized Injections. Current portfolio of 123 product registrations(28 in pipeline) comprises mainly of 58 antibiotics, 10 analgesics, 6 anti-histamines, 5 anthelmintic and 5 anti Malarial drugs

  2. It is Microcap company , having Mcap of nearly 85 crore at CMP of 65. Presenty listed on NSE emerge and Company planning to move it to NSE main Board.

  3. Sakar Healthcare an ISO 9001:2008 BVQI certified company. Total four state of art manufacturing units which are certified by WHO-GMP, cGMP, in addition to the approvals by ‘National Drug Authority, Uganda, Kenya, Yemen, Ethiopia, Congo, Ghana, MCAZ (Zimbabwe), Namibia, Nigeria & Cote D’Ivoire.

  4. It also cater to Srilanka, Philippines, Vietnam, Cambodia, Sudan, Myanmar, Mauritius, and Costa Rica, Panama, El-salvador, Paraguay, etc. in Latin America.

  5. Company increased Operating & net margin by Increasing share of Direct Sales and Export( 62% to 78%) compared to contract manufacturing(38% to 22%) in last 3 years.

  6. Products :-
    a. ORAL - LIQUID SYRUP & SUSPENSION
    b. LIQUID INJECTABLE (SVP) - VIALS & AMPOULES
    c. CEPHALOSPORIN - DRY POWDER INJECTIONS
    d. CEPHALOSPORIN – ORAL SOLID
    e. LYOPHILISED INJECTIONS (IN VIALS)

  7. Following are clients of Sakar Healthcare for contract manufacturing

Zydus Cadila, Torrent Pharma, Intas, Claris, Merk
Indoco Remedies, Cipla, Stride Arcolab Ltd
Abott, IPCA, Biochem, Wockart

  1. Manufacturing plant
    Total Four Plant Plant-1, Plant-2, PLant-3, Plant 4 in Changodar, Ahmedabad.GUJARAT
    Total area -10022 Sq M2

Plant-1 ORAL - LIQUID SYRUP & SUSPENSION

Plant-2 LIQUID INJECTABLE (SVP) - VIALS & AMPOULES, LYOPHILISED INJECTIONS (IN VIALS)

Plant-3 CEPHALOSPORIN - DRY POWDER INJECTIONS

Plant-4 CEPHALOSPORIN – ORAL SOLID

Overall Utilization around 57%.

  1. Company willing to Venture in Oncology Generic Drugs with New Plant , Company has bought recently Land adjacent to Existing building for this new plant.

  2. Promoter Increased Stake on capital infusion by buying 27.5 lac Share recently by Preferential offer @65 ( 55 Premium on FV10). Promoter are willing to spend this amount for Oncology Project.

  3. Promotor has high stake of 71.82% in company & 10% stake are with big HNI/Institution investor so share is tightly held.

  4. Promoters :-
    Mr Sanjay Shah Managing Director Holds a degree of Master of Business Administration from Vikram University, Ujjain, Madhya Pradesh. Apart from that, he is also qualified in plastic technology.
    Mr Aarsh Shah Jt Managing Director He is a Pharmacist and holds a degree of Master of Business Administration from University of Cardiff, UK.

  5. Financial.

  • Good Revenue Growth with EPS growth.
    -Debt is reducing.

Risk Analysis :-

  1. EU GMP registration still pending.
  2. Tough competition in Domestic Market for local Brand.

Disclosure :- Have in Portfolio (5%) bought during IPO.

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Thank you for starting the discussion on what looks like a good company
My only question bad of now is “why accounts receivable for 2018 doubled although revenue did not double?”

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Noted, However Revenue Growth not impressive in last one year, as they are awaiting EU GMP certification. after getting that EU GMP Certification, Europe market will be next growth drivers. as plant running nearly 57% utilization, Hence Revenue will increase significantly without any capex for existing product portfolio.

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There is no growth On the contrary last years revenue might be overstated by the amount of extra receivable over average

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They are planning an entry in onco. Orders for equipments placed. Plant to commence operations may be in end 2020 or beginning 2021.
It is into contract manufacturing and major business comes by doing job work for bigger firms / exporters currently too early to comment on growth. Mainly into commodity business of cefa range.

Not invested.

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Hi, is anyone still tracking this micro cap pharma compnay ? I will appriciate if someone reply to my below mentioned points -

  1.  In the year 2017-18 rate of depreciation on computers was changed from earlier depreciation rate of  31.67% ( which was as per companies act) to 13.96%, please elaborate the reason for the same. Same issue of depreciation rate change is there in the Factory Building in 2018-19. May please clarify.
    
  2.  From the year 2017-18 we are showing Intangible assets in the balance sheet and amortizing it @31.67%. May please provide details/nature of such assets for the year 2017-18 to 2019-20.
    
  3.  As mentioned in the prospectus and in credit rating reports we are in contract manufacturing and sell our own formulations through dealers in various semi regulated export markets. I want to know more about the export business we are in, do we manufacture formulations on their behalf or we are doing it under our own brand.
    
  4.  We are in the formulation business from last so many years, do we have any IPs in this field.
    
  5.  What is our current strength of scientist and PHDs engaged in R&D work
    
  6.  In the recent quarterly result ie. Q3 2020-21 , our margins were impacted due to higher raw material cost and that was the first time we faced such a situation in last so many quarters. May please explain the reason for contraction in the margin. Along with that I also want to know how we manage fluctuations in raw material prices, do we have pass through mechanism for increase in raw material cost in our final product?
    
  7.  For the last seven years our margins are in the range of 20-25% and that time we were doing regular capex. So now when we already established capacities can we expect any expansion in margins going forward due to overhead savings etc . may please share your views on it.
    
  8.  From the last four years we are continuously diluting equity share capital by way of share warrants and preferential allotment, though increasing stake by promoters showing their conviction in the business but at the same time it is impacting return on equity . Do we have any plans for further dilution, may please clarify.
    
  9.   Export is the major portion of our total revenue, to neutralize foreign currency risk do we have any hedging policy in place or not?
    
  10. We have one of the best working capital management as compared to peers, so please share insights about how we are managing receivable turnover and inventory turnover so efficiently?

  11. As compared to our peers, what are the key competitive advantages we have over our competitors?

  12. As per our latest board meeting, we are converting promoter’s loan into equity in form of preferential allotment. Whether that loan carries any interest or it is interest free, may please also share the rationale behind its conversion in equity.

Oncology Capex:

  1.  As capex for oncology plant is already going on, please share the breakup of how much money has already been spent and balance capex amount. Alongside also share a timeline, when that plant will start generating revenue.
    
  2.  As per CARE latest credit rating report total capex for the oncology segment will be around 140 crs, how much asset turnover we can expect from this upcoming plant, and any guidance on margins.
    
  3.  There are many companies which are dedicated only to oncology segment, from as big as Natco pharma to Shilpa Medicare and in small cap companies like Beta drugs limited. They are established players and dedicatedly working on R&D for new molecules in oncology API. What kind of advantages we have over these established players, please share your views on it. and whether we are targeting any particular TKIs or molecules in the oncology segment.
    

I have already mailed these questions to the CS of the Sakar healthcare and waiting for their response.

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Today I received a mail form their CS, pasting here if anyone is interested. Though i am still not satisfied with few answers.

We are pleased to know and appreciate your continued support, faith and association with the company.

With regards to the concerns raised by you, the clarifications sought by you are as follows:

  1.   In the year 2017-18 rate of depreciation on computers was changed from earlier depreciation rate of 31.67% (which was as per companies act) to 13.96%, please elaborate the reason for the same. Same issue of depreciation rate change is there in the Factory Building in 2018-19. May please clarify.
    

Reply: The company has been consistently applying the rates of depreciation prescribed under the companies Act, 2013 on the respective asset class and there have been no changes in the rate of depreciation applied to the respective asset class. Rate of depreciation applied on the asset class computers is 31.67% and not 13.96% and similarly depreciation at the rate of 3.17% has been consistently applied all through the years on the asset class Factory building.

  1.   From the year 2017-18 we are showing Intangible assets in the balance sheet and amortizing it @31.67%. May please provide details/nature of such assets for the year 2017-18 to 2019-20.
    

Reply: The intangible asset class as presented in the balance sheet consists of companies Product registrations and product permissions obtained by the company in overseas market where the company sells the respective products in its own name.

  1.   As mentioned in the prospectus and in credit rating reports we are in contract manufacturing and sell our own formulations through dealers in various semi regulated export markets. I want to know more about the export business we are in, do we manufacture formulations on their behalf or we are doing it under our own brand.
    

Reply: The export portfolio of the company consists of company own products registered in companies name in overseas market where the company sells its own product through its appointed distributors.

  1.   We are in the formulation business from last so many years, do we have any IPs in this field.
    

Reply: The company does not have any IP.

  1.   What is our current strength of scientist and PHDs engaged in R&D work.
    

Reply: Company has in-house team of scientists who are engaged in R&D work.

  1.   In the recent quarterly result i.e. Q3 2020-21, our margins were impacted due to higher raw material cost and that was the first time we faced such a situation in last so many quarters. May please explain the reason for contraction in the margin. Along with that I also want to know how we manage fluctuations in raw material prices, do we have pass through mechanism for increase in raw material cost in our final product?
    

Reply: As rightly pointed out by you the Q3 results have been impacted by the increase in raw-material cost, which resulted in reduced margins. The increase in raw material prices was unprecedented resulting out of pandemic situation and sudden hold of imports, though the markets are stabilizing gradually, and we also expect the spike in raw material prices to normalize which would help the company regain its margins. The selling price of the final products are adjusted to take care of the fluctuations in raw material prices in the ordinary course of business. The price trends in Q3 being exceptional and temporary the company chose to absorb the price fluctuation instead of passing it on to our regular buyers in the larger interest of the company’s growth and goodwill.

  1.   For the last seven years our margins are in the range of 20-25% and that time we were doing regular capex. So now when we already established capacities can we expect any expansion in margins going forward due to overhead savings etc. may please share your views on it.
    

Reply: The company is in the process of strategizing its growth trajectory which includes expansion into oncology segment to achieve increased profit margins, impact of overhead savings could be known in the following periods of operations.

  1.   From the last four years we are continuously diluting equity share capital by way of share warrants and preferential allotment, though increasing stake by promoters showing their conviction in the business but at the same time it is impacting return on equity. Do we have any plans for further dilution, may please clarify.
    

Reply: The company is in growth stage which requires infusion of funds at regular intervals comprising of optimal mix of equity and debt, in order the ensure optimal capital structure and optimal cost of capital there has been regular infusion of funds by the promoters. As also rightly pointed out, the conviction of promoters in their business motivates the promoters to infuse their own funds which is by way of preferential issues. We are under process of preferential allotment which details are available on the website of the company i.e. www.sakarhealthcare.com.

  1.   Export is the major portion of our total revenue, to neutralize foreign currency risk do we have any hedging policy in place or not?
    

Reply: Exports comprise major portion of company’s revenue and forex rate fluctuations being the risk faced by the company, the company has been devising various actionable to mitigate this forex rate fluctuation risk of which one being opening EEFC account and the company is also in the process of appointing treasury team which will strategize and devise the process to mitigate the risk of forex rate fluctuations.

  1.   We have one of the best working capital management as compared to peers, so please share insights about how we are managing receivable turnover and inventory turnover so efficiently?
    

Reply: The company has been able manage its working capital optimally owing to the company’s receivable and inventory management policies and practices.

  1.   As compared to our peers, what are the key competitive advantages we have over our competitors?
    

Reply: Sakar healthcare is well equipped with the Manpower, Technology and funding requirement. Further as you already know that the company got the EU GMP approval for Small Volume Parenteral (SVP) manufacturing unit of liquid injections and Lyophilised injections which is addition to the brand building for the company.

  1.   As per our latest board meeting, we are converting promoter’s loan into equity in form of preferential allotment. Whether that loan carries any interest or it is interest free, may please also share the rationale behind its conversion in equity.
    

Reply: The loan of the promoters is unsecured and interest free though notional interest is charged in the books of account in compliance with IndAS stipulations. The loan of the promoters is being converted into equity in compliance with the stipulation of our bankers to ensure the debt equity ratio required for the proposed expansion of the company’s operations into Oncology segment.

Oncology Capex:

  1.   As capex for oncology plant is already going on, please share the breakup of how much money has already been spent and balance capex amount. Alongside also share a timeline, when that plant will start generating revenue.
    

Reply: The oncology project is scheduled to be implemented in two phases with total capex of approximately 145 crores. The phase I capex is estimated at 115 crores out of which the company has incurred approximately 57 crores towards capex of oncology project uptill the end of Q3 and the company estimates that the revenue generation from October 2021 for oncology products planned in Phase - I. Phase II capex is estimated at Rs. 30 crores is planned for implementation in FY 2023.

  1.   As per CARE latest credit rating report total capex for the oncology segment will be around 140 crs, how much asset turnover we can expect from this upcoming plant, and any guidance on margins.
    

Reply: The rating activity has been carried out by ICRA and assets turnover of approximately 3 times is estimated by the company from the planned capex estimated to be achieved over a period of 5 years after complete implementation of the project. The company estimates improved margins adding to the existing margins of the company.

  1.   There are many companies which are dedicated only to oncology segment, from as big as Natco pharma to Shilpa Medicare and in small cap companies like Beta drugs limited. They are established players and dedicatedly working on R&D for new molecules in oncology API. What kind of advantages we have over these established players, please share your views on it. and whether we are targeting any particularTKIs or molecules in the oncology segment.
    

Reply: Ahmedabad being a Pharma hub of India, with world renowned and established companies, provides a locational advantage to Sakar of being a local manufacturer of oncology products. Presently all the big pharma companies get many of their oncology products manufactured at far away locations and Sakar’s proposed oncology manufacturing facility provides them ease in terms of localization, control, supervision and logistics benefits. Sakar being a preferred manufacturing location for all the big pharma companies already will be benefited from the existing relations giving Sakar required initial thrust required to successfully launch itself into oncology market segment. The company has already identified molecules for the oncology manufacturing facility.

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I have been tracking Sakar recently. Have gone through annual reports and came across some observation regarding “section V. Indebtness”.

My observation is that the indebtness shown on any financial closing year (31st march) shall be reported as opening amount in next financial year (1 st April) as shown in snaps below.

This has been happening for several years (2016,2017,2018) properly however for 2019 closing amount (Rs 4,28,04,423) does not match with opening amount ( Rs 3,64,26,634) in 2020.

Supporting snaps are as below:

image

Just an observation point. Will post further points as am still reading the annual reports.

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Is it because the unsecured loans from the promoter is converted to preferential allotment(shares) ?
or its a mistake in the annual report (should be questioned to management?)

@cabunny

Thanks for posting management replies to your well articulated queries. It helped alot. Do you have any idea of contribution of contract manufacturing business to fy19 and fy20 revenues ? Company was providing such breakup till fy18 and from fy19 it doesn’t seem to provide the same.

Some observations from my side on the company -

  1. A 2.8x increase in gross block to 220 cr over coming two years from 78 cr of 2020 seems a big stride attempted by the management. Successful execution of the same is the key thing we need to keep a close watch on.

  2. Current market cap of 150 cr seems to provide a good amount of safety if we consider gross block of 220 cr in 2022 and incremental revenue generation @22 % + EBITDA margin. Evenif we take into account debt of 75 cr required for completing capex then an ev of 225 cr also gives us only 1xgross block which is good.

  3. Entry of pharma focused investment fund like HBM healthcare investing at price of 99 per share in the company for a 9 % equity stake is a positive sign.

  4. Although optically company seems to be a tiny company but this seems to be because it only books income generated from contract manufacturing into revenues and not actual sales. So, if we look at past data then company seems to be currently a 170-180 cr revenue entity and not 83 cr as is posted. EBITDA margin also seems to be low at around 12 % and not 22 % as is posted.

  5. Over the years equity dilution seems quite significant with current preferential allotment to HBM taking equity to 17.21 cr. If management contention of 3x revenues from current capex in next 5 years is true then only such recurrent and continuous equity generation can be justified.

  6. If seniors or any other fellow member who has knowledge of oncology segment can guide what kind of asset turns and ebitda margins does oncology segment enjoys, it will be great asset to this thread as commissioning and ramp up of 145 cr investment in oncology segment is key thing to track for investors in this company.

  7. How exports progress over next year that is to be seen as EUGMP approval was inplace only I think from q321.

Trying to extract past data for the company. Overall a good company to study.

Thanks
Dhrumesh

Disclosure: recently invested and looking for opportunities to add.

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hello sir,
can explain the point no 4, didnt understand.
Also for point 3, HBM are you are referring to Cobra Mauritus (HBM Cobra ?)…

thanks
raghu

Disclosure: Invested 5%, in next 2 to 3 years, will make it 10% based on the progress
1.High risk high reward: ~ 30% sales come from Contract Manufacturing rest from unregulated markets. EUGMP validates their quality consciousness.
2. Among various therapeutic areas Oncology in general is a high growth area. New generation medicines are increasing life expectancy making patients consume more medicines. Like diabetes and cardiology, these medicines have to be consumed on a regular basis
Risk factors: If the company does not come up with the right product mix, profitability will be severely impacted. They did not disclose the molecules they would manufacture in the new facility
Company have taken Rs 72 Crores term loan. Management must have thought million times before getting into this expansion, they know pretty well, if they fail, they will go back to a kind of stone age
What excited me to invest in this company is the term loan, they have their skin in the game. I am planning to remain invested in this company for 5 years. ICRA’s assessment is, about Rs 450 Crore additional sales in the next 5 years, this additional capex gives more than 450% increase in sales from 2021. My expectation is market cap could go up to Rs 600 Crores by 2026. Profitability during initial 2 quarters of 2022 will be low as the overheads increase and low capacity utilization of new facility.
Please note: My above notes are purely my calculations and my thought process for buying this stock and not a recommendation.

These were the top selling drugs for the CY 2020

Humira is used for rheumatoid arthritis, Revlimid is a Cancer drug, Keytruda used for skin cancer, Opdivo is used to treat lung cancer. Avastin is used to treat cancers of kidney, colon, rectum, lung and breast. Ibrance is used to treat breast cancer.
5 of the top 10 drugs sold globally in 2020 are related to cancer. Except for Avastin every other drug has a growth of more than 10%.
My notes here are just to explain the growth in Oncology. Sakar will not be in a position to manufacture the above medicines as they are still under patents.
During the earnings call we need to get more information about the depth of manufacturing. Are they doing N-2 or N-3 steps to manufacture the 3 new molecules. Profitability depends on the number of steps and the complexity involved.

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Regarding point 3, Cobra india is controlled by HBM Cobra india which is finally controlled by HBM partners ag.

Regarding point 4, as per credit rating reports, sakar books only profit from contract manufacturing as revenue and not entire sales value. As per those report, when company’s reported contract manufacturing revenue was 9 cr and consolidated sales was around 20 cr, its actual revenue was 100 cr. if we consider actual sales of contract manufacturing products.

I dont think 30 % sales or 24 cr will be coming from contract manufacturing business as till fy17 it was just 9 cr and after that revenue has grown majorly by exports growth where there is no contract manufacturing involved.

Where u got this figure of potential sales of 450 cr as I have also accessed icra reports but nowhere such figure is mentioned. Only in the management reply which is posted before by other member, such 3x sales potential is mentioned. However, we need to be realistic and take all projections with a pinch of salt unless it is specifically mentioned in any credit rating reports.

If we look at past figures, since beginning from 2005, it is only now in fy20 that company has reached sales of just slightly above 1x gross block. So, to expect that in few years it will reach 3x seems highly unlikely unless it is going for some real high value products. Only members who are expert in oncology segment can properly comment on this.

Company is I think not hosting any concalls. If it has hosted then if you have transcript of that then please post it. It will be really helpful.

I read this 30% number somewhere, I can’t locate the source right away. Please let me know if you have different views about the company?
Regarding earnings call, I meant whenever it happens.

Hi, Can you please clarify where did you get this? The revenue recognition policy does not indicate so anywhere, please see the exact wording:

image

Moreover, the schedules for sales and cost of materials do not indicate any such thing. It looks like standard manufacturing revenue only:

Source of this are the credit rating reports – first of CARE and then of ICRA. Since these are paid reports so cant post them but you can yourself purchase them and check. Will specifically quote here one glimpse from 2017 rating report wherein FY16 topline was 41.43 cr ; rating report had specifically mentioned the fact that only profit from contract manufacturing is accounted in this revenue and if sales value of products under contract manufacturing is considered, then, revenue is actually 140 cr. ; this is when contract manufacturing business was worth 9 cr in its then 41 cr reported topline. Hence, revenue seems to be under reported and margin over reported.

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Domestic sales to total sales ~ 30%
IMHO, surprised that rating agency provides a different revenue mix from annual report,. Please share the url, would like to subscribe to the report.

Concerned about Cobra India (Mauritius) Limited’s investment, as companies that received investments are either under water or sold. Bad omen?

Rating reports are public and the 2017 report contains no such reference:

I checked all the Annual Reports from 2012-13 till date as well as DRHP with SEBI but could not find any such thing. You may want to check your source again.