ValuePickr Forum

Smruthi Organics

We have been tracking this company for few years and we like the way the company has performed in the last 2-3 years and yet remains ignored and undervalued. We feel itas a good pharma company to make a part of portfolio.

Smruthi Organics is asmall sized pharma companybased out of Solapur, engaged inmanufacturing of APIs, drug intermediates, specialty chemicals & contract manufacturing.

The company has undergone a major change since about year 2005-06. At that time, the company had started upgrading its manufacturing facilities to make them USFDA, European GMP compliant. Itreceived USFDA approvalin 2007. Since 2005 the company has been growing continuously and has grown from a turnover of just 32 Cr to 121 Cr last year. This year they should cross 150 Cr turnover.

Smruthi is a leader in the following APIs and owns the following 4 Drug Master Files (DMF) a Norfloxacin, Metformin HCL, Amlodipine Besilate & Carbidopa. The company is expanding its product portfolio by filling more DMFs in both US & EU.

HavingUSFDA & European GMP approved facilitiesis a big advantage and to capitalize the true potential, the company has started focusing on Contract Manufacturing space andworks closely withlarge pharma companies like**Merck, Watson, Sandoz etc.**The company has 7 products as of now and would be adding new products every year to make Contract Manufacturing a constant earning stream.

Attractive valuations at CMP of about 135:

  • The co has been growing at a**CAGR of about 28% for last 5 years.**Turnover has grown from 45 Cr in 2006 to 121 Cr last year. This year again the company is expected to grow about 27-28% and cross 150 Cr turnover.
  • Stock is trading at aPE multiple of less than 6based on 12 month earnings till now.
  • Book Valueas on 31st December 2010:Rs.65.60.
  • Promoter holding has increasedfrom 56% last year to 65%+ as of Dec, 2010.
  • Market Capitalizationof the company isabout 50 Crorevs expected turnover of about 150 Crore this year. Usually pharma companies trade at much higher valuations.

http://dalal-street.in/smruthi-organics-ltd-bse-code-590046/

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Ayush,

Couple of questions and observations…

1). Earnings (both quarterly and annual) seem to be lumpy. For a API producer in the pharma space, why should that be the case?

  1. The valuation seems to be cheap for a long time. i.e. it has been undervalued for a while now. What is the trigger that you see for this stock for it to be re-rated now?

3). And finally, a more generic question on the sector itself. How is the recent pharma mergers (I believe there would be more consolidation in the future) affect these supplier companies/

Regards,
Abhishek
http://valueinvstr.blogspot.com

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Hi Abhishek,

Yes, earnings were much lumpy earlier…but things seem to have stabilized in last few qtrs.

I think the stock has remained undervalued caus of lack of awareness about the co and the stock being illiquid. But with the co attaining a size now and constant stream of revenues coming in…the things could change. The co is now a 150 Cr turnover co…and now big enough for investors to participate.

I think it should be positive for the suppliers as if they are indeed good, then they would get more business at a bigger scale.

Overall what I like is - given the current performance and valuations, there is a decent margin of safety. Now if the co continues to do well and grow, this stock can give very good returns down few years.

Views Invited.

Regards,

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Hi Ayush,

http://www.wanbury.com/api.htmlclaims to be largest producer of metformin with installed capacity of 8500MT with market share of more than 30%.

Now if we look a high level total market for same seems to be 30k MT. can you put some light on how market is growing for this product.

Hi Vishal,

Metformin, is one of the fast growing area as it is used for treatment ofdiabitiesand the way this disease is growing (esp in India), the volumes are there for next 5 yrs+.

Have heard that Smruthi’s major customer is US Vitamins and Smruthi also supplies to other major MNCs. US Vitamins has almost 25-30% market share in India. If you go through the annual report of the co for FY 11, the undertone seemed quite positive for this expansion and it could be that the co has assured offtake sort of agreement. The co is expanding capacity of Metformin from 2000 MT To 5000 MT.

The major player Wanbury in this segment is going through a bad financial position and might not be much of a trouble as a competitor.

Ayush

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Hi Ayush,

Its a bit surprising that not many people have picked up on this thread of yours since April 2011! The stock price meanwhile has increased by 50%+

Just a few questions from my side.

Could you tell me the main raw materials the company uses and the latest trend in their prices? Margins have decreased substantially over the last few quarters. Sales have gone up but operating profits haven’t increased at the same pace.

Could you also tell us when exactly the company will complete expansion and when this will be reflected in the financials?

Can you tell us what % of revenue comes from Metformin?

Thanks!

cheers,

Subbu

Hi Subbu,

Yup, the co has done and well and so has the price. The margins went down only in the last qtr, otherwise they have been fairly stable…many often such variations are regular.

Being a small under-researched co, very limited information is available. So don’t know the exact break-up and other details. I expect Metformin to form atleast 20-25%+ of their turnover.

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Hi Ayush,

Thanks for starting the thread.

When few years back I saw this stock, i found it very lumpy. Debt to equity was something i was not comfortable with. But of late they have been consistently bringing this down. Their return ratios were not so great. But there have been improvement there as well. Interest payments year on year is coming down.

It will be good to know the status of their expansion. It will be great if you can have a management discussion with these guys.

Hi Dinesh,

Yes, there has been a remarkable improvement in the fundamentals of the company. Have tried speaking to the mgmt earlier but they are not open to analysts etc.

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Qtrly results-http://www.bseindia.com/xml-data/corpfiling/AttachLive/Smruthi_Organics_Ltd_220512_Rst.pdf

Not too great results from smruthi on first look…

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Yeah, the profitability is affected but the good thing is that the topline is intact. For last 5 yrs, the CAGR growth has been @ 40% for the co and with the expansions lined up, may be we would see another 20-25% growth for this year.

Ayush,

Anyinformation onpromoters (Eaga Family), Management, Future Plans. Also what do you think will be the impact Pharma policy on Metformin business going forward?

Satya

Hi,

The promoters are quite low profile. They have undertaken a major expansion this year and the details are here -http://dalal-street.in/smruthi-organics-update/

I think the expansion should start contributing from this qtr.

No idea about the impact of pharma policy.

Ayush

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any specific reason for drop in margin for Q3

The turnover has been droping off slowly since last 2 qtrs and its not good. I think the expansion has not yet started and this weaker performance may be due to that.

Investors in this co should try writing/calling to the co to get an update on the expansion.

Ayush

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Hi
Is anyone still tracking this?
The company has posted a EBIT of Rs. 3.3 crores in Q4 FY’15 and things seem to turning around for this company according to their annual report of FY’14-15.

Excerpts from its Annual Report FY’14-15:

  • There was a labor strike for about 3 months which affected the operations and resulted in loss for the year.
  • The company is rationalizing its product portfolio by elimination low margin products and increasing marketing focus on high margin products. They have discontinued Ciprofloxacin and cut down production of Norfloxacin.
  • Company has improved labor relations and are formulating better HR policies to ward off labor strikes in future.
  • Quality team is actively engaged in overhauling quality systems and procedures to improve regulatory compliance. They are addressing the regulatory issues flagged by USFDA for their Solapur plant.
  • The company is exploring new global markets to give a major boost to profitablity.
  • They have enhanced their marketing team to expand their customer base in unexplored markets of South East Asia, Middle East, Latin America and Africa.
  • Moderate capacity usage provides large upside for increasing revenue without incurring significant capex.
  • Company has high installed capacity of Metformin HCL which can generate higher profits going forward.
  • They are implementing measures to reduce operating costs.
  • Company is implementing a suitable ERP in FY’15-16.

Disclosure: Invested (200@Rs.120)

Hello All,

If I am not wrong, there was a labour strike again in Q1 15-16, which has affected its revenues and hence profits too when compared to Q on Q. They faced regulatory issues regards to USFDA some years ago which led to drop in sales. They seem to be sorting the same and in the meantime also trying to push its products in other markets. Does anyone have any update on the latest labour strike?
If anyone has successfully tried speaking to the management, then please update. @ayushmit
Need to closely watch for Q2 results. TIA

Rite now there is no strike…In Q1 strike was there for 1-2 days…
IN Q1 they were just able to breakeven (15 lac loss)

I use to track this company back in 2012. Company had decent numbers but then it went into a regulatory mess in 2013 and never recovered back from it. Company’s problems reached it’s peak in 2014-2015 and they had to cut back on production of key products and also faced labour issues.
After a prolonged period of 4 years company showed decent sales growth in 2018 and finally it looks like that company is coming out of consolidation and aiming for growth. In FY18 they took the hard pill of writing off debtors of 2013 period through P&L. Management is talking about Formulation business for the 1st time in 10 years in 2018. Company has showed good growth in exports in FY18.
Following are a few highlights from FY18 Annual Report.

  1. Inspite of achieving operational profit of Rs. 308 Lakhs, company has posted net loss of Rs. 321.33 Lakhs on account of write off of irrecoverable net receivables of Rs 794 Lakhs consequent upon cancellation of regulatory approvals of the company.

  2. The company made marginal investments in R&D in FY 2017-2018 primarily for process improvement and cost reduction of existing products. However, as the company’s financial performance is improving, the company is increasing its R&D spends in the next financial year. The company is opening a new R&D facility with an aim to develop 4 – 5 new products every year.

  3. 3 of our key products have grown by over 70% in volume year on year contribution to majority of the growth in top line.

  4. Despite competitive pressure on finished product prices and rise in input prices, the company has been able to improve its operational margins due to various cost cutting and productivity improvement measures undertaken during the year

  5. In FY 2018 - 19, the company has secured several long term supply contracts with customers, which are contributing to top line growth and capacity utilization. Going forward, in addition to pursuing volume growth of existing products, the company is launching 2 – 3 new high margin products in FY 2018 – 19, which will build a platform for future growth.

  6. Our API R&D expansion, undertaken in FY 2018 – 19, will ensure delivery of 4 – 5 new API every year while generating valuable intellectual property

  7. The company is also working on developing a formulations marketing business in FY 2018 – 19. The focus will be on creating intellectual property of novel formulations and build a niche market for them subsequently.

  8. The Indian API industry is currently facing a threat of reliable and low cost supply of raw materials from China, due to initiatives taken by the Chinese Government to tackle pollution amongst others. The pressure of rising raw material prices is continuing in addition to sudden supply shocks. The company is also facing this situation and is integrating backward by developing in house raw material manufacturing capability or developing manufacturing processes involving alternative raw materials.

  9. Company has invested substantial amounts in upgrading effluent treatment facilities in this financial year.

  10. R&D exp at 0.35% of sales.

  11. Forex earned at Rs. 41.72 cr compared to Rs. 27.61 cr in FY17.

Regards
Harshit

Disclosure: Invested

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