Titan Biotech Limited

Stock Opportunities Untested - but worth a good look
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Summary

Titan Biotech is a manufacturing company involved in producing certain chemicals and equipment utilizing a mixture of chemical synthesis, fermentation as well as core manufacturing. Their products are used in Downstream industries like Nutraceuticals, Diagnostics, Pharmaceuticals, agriculture, animal nutrition. Company did turnover of 70cr in FY20 and is classified as an MSME. Company has 2 factories (both in Bhiwadi, Rajasthan). Company has existed for roughly 30 years (since 1992). Company is benefiting from strong (though partially temporary) tailwinds due to Covid-19 pandemic and subsequent increase in demand for Viral Transmission kits (which the company makes).

Core Business

Titan Biotech Limited manufactures and sells biological products in India. The company offers food ingredients, including hydrolyzed vegetable protein, yeast extract powder, calcium propionate powder, potassium sorbate, and calcium lactate; collagen and protein products, such as specter whey protein, collagen peptides, brown rice protein, fish collagen, pea protein isolate, chicken protein isolate, soya protein isolate, milk protein, and protein hydrolysate; and nutraceutical and pharmaceutical products comprising sodium caseinate, chondroitin sulfate, hyaluronic acid, methyl sulphonyl methane, chelated minerals, peptone, OX bile extract, cholic acid, cerebroprotein hydrolysate, methyl sulphonyl methane, iron protein succinylate, medicinal yeast, and brewer yeast protein, as well as liver, meat, malt, and yeast extracts. In addition, it provides products in the areas of animal nutrition, including binding agents, chelates minerals, mold inhibitors, proteins, and yeasts. The company’s products are used in the field of pharmaceuticals, nutraceuticals, food and beverages, biotechnology and fermentation, cosmetics, veterinary and animal feed, agriculture, microbiology culture media, plant tissue culture media, etc. The company also exports its products.

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Subsidiary Peptech Biosciences

As one of the leading Biotechnology based Company, we have spent more than 20 years of valuable period in particularly Microbiological segment which we have integrated with our latest fermentation technology Agricultural benefits products, have proven to increase the yield significantly which can be absorbed fast and directly by crops, improving soil structure, increasing bunch weight and quantity and other great effects. It is the one which can be relied on to reach another peak of yield record, at the same time preserving our soil in the best condition for our next generation.

Peptech Biosciences Ltd. is oriented to B2B (Business-to-Business) selling to all Marketing & Distribution Companies that can sell the products under their Brand Names in the Global Market.

Financials

Attribute/year 2020 2015 5-yr CAGR
Revenue (in Cr) 79.88 40.71 0.1443197426
Cost of Material Consumed 40 31.38 0.04973918845
Employee Expenses 12.5 2.73 0.3556559146
Finance Costs 2.33 0.99 0.1867087519
Depreciation and Amortization 1.8 0.83 0.1674515942
Other Expenses (Manufacturing, Operating, Administrative, Selling & distribution) 8.28 3.61 0.1806050239
Net Profit 7.83 1.63 0.3687206878

We can see that revenue has grown by ~15% in last 5 years. Profits have grown by ~37%. This is due to large % of expenses being raw material costs, which have not grown much (~5% CAGR in last 5 years). This shows that either product mix has changed, with contributions from better products, or due to appreciation of final selling price.

Management

Company/Management has given regular dividends. This shows that it is shareholder friendly.

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When the earnings rose due to Covid-19, Management clearly outlined that the revenue was growing disproportionately due to Covid-19. In fact they outlined exactly how much the jump in revenue was due to Covid related sales.

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Investment thesis

The company revenues and profits were compounding well even before Covid-19 hit. Company creates products which are consumed in industries with good tailwinds: agro, diagnostics, animal nutrition, human nutraceuticals etc. It remains to be seen whether any of the elevated sales due to Covid-19 are sticky or purely one-off. If the company is able go create new relationships with clients leading to sustainably higher business, then the investment thesis becomes much better.

Valuation

Looking at the last 10 years it has been valued at close to 0.8x revenues. This is common in small and illiquid companies like Titan. Investors pay a discount due to the high probability of failure. It is available at 1.1x sales right now, which is a bit above average valuation.

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One has to take their individual call regarding valuation but I would be comfortable buying little quantities at these levels and either average up (if the business improves) or average down (if business improves but price collapses due to any factors).

Risks

  1. Peanut-Buttering: For a company of this size, they seem to be spreading themselves too thin. What surprised me was the absolute number of products they manufacture. As per my estimation, from all the 3 websites, this number is around 50. While some products would share processes, this is still a fairly large number of products. One risk to the investment thesis is that possibly they do not manufacture all these products, some of them could potentially just be traded. Trading companies are not as exciting as manufacturing companies.
  2. Scale-up: This is a small company (70 cr turnover). There is always the risk that they would not be able to scale up. Here are some articles that demonstrate in an unrelated industry (auto), how hard it has been for Tesla (US listed auto-maker) to scale up (link1, link2).
  3. Valuations: One key monitorable would be about the nature of covid-19 vaccine. If it turns out that Covid-19 would need regular vaccines (say twice a year for life), then the company’s revenues from TMMedia (Viral Transmission Kits) are potentially scalable since people would need to get tested regularly for Covid-19. In this scenario, the revenues would probably remain at elevated levels, in years to come. On the other hand, if it turns out 1 covid vaccine lasts a person immunity for lifetime, then these elevated revenues (7cr additional sales in Q2FY21) would go away. In such a scenario, the current TTM earnings are superficially elevated and hence, the company is available at a steep valuation compared to its usual earnings.
  4. Investor-Friendliness: In a small company like this one, it is also difficult to know what is going on inside the company. As the reader can see in the second post, investors had asked some very good questions about the company’s functioning, but all of them were not satisfactorily addressed by the management. This remains a risk of investing in such a small company. Unlike mid and large sized companies, we cannot expect communication with management more than twice (Annual Report & AGM) a year.
  5. Pricing Power: While the company claims to be a Biotech company, most of their products are commodity in nature (as per my understanding) and hence it is not possible for Titan Biotech to have any pricing power: their profitability is completely a function of demand-supply dynamics which are difficult to forecast for outside investors.

PS: I could find an older topic for Titan Biotech, but it was perhaps closed due to an incomplete first post. Hence, i started a new topic. Would be happy if we want to merge the two.

Sources:
[1]: Annual Report for FY20: https://www.bseindia.com/xml-data/corpfiling/AttachLive/75d0c16a-d332-4e20-b0f5-30f2c86cdcda.pdf
[2]: AGM for FY20: https://www.youtube.com/watch?v=FvBpXhEZgMw
[3]: Company Website: https://titanbiotechltd.com/
[4]: Subsidiary Website: https://www.peptechbio.com/about/
[5]: Company Brand (TM media) website: http://tmmedia.in/

Disc: Not invested yet, looking to add small quantities in coming few weeks.

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The AGM for FY20 is available on Youtube:

Here are some notes I made for my understanding:

AGM 2020 Notes

Opening Remarks

  1. Company took permission to work with a minimum workforce in factories, products were covered under essential goods.
  2. Company operations were impacted by labour and product shortages. Company adopted WFH policies for non-plant employees.
  3. Company is covered under MSME.
  4. Company serves in Food and Pharma.
  5. Company continues to do R&D of new products and many such new products were introduced.

Investor Shlok Dave:

  1. Commentary on Q4-FY20 and Q1-FY21: Is this sustainable revenue and margins, or is it extraordinary due to covid?
  2. Nature of company: Chemicals we make: Break-up of revenues and how do we see the various segments growing.
  3. What would you classify as an intermediate versus a finished product, that we are selling?
  4. What are our key starting materials, and how much of manufacturing processes are fermentation based? How much of the business is Purely fermentation based versus chemical Synthesis.
  5. How many steps do we have in the products that we are making?
  6. Who is your competition? Especially with respect to imports. I have not found many domestic companies which make these products?
  7. How much of products are supplied to Pharma, Diagnostic labs, other companies?
  8. Are these continuous batch processes, Culture medium what is the process of making it? Is it made continuously or is it made in batches?
  9. How do the facilities look? What is the nature of assets?
  10. You’ve written a lot about peptones in your annual report. What kind of realization do we see there? Is it volatile, is it seasonal, is it steady?
  11. The gross margins have changed over years. Is it due to the product mix becoming better or is it because sales price has moved higher?
  12. Raw material prices and stability.
  13. 2017 AR you said you modernized the plant. What did you do exactly? What benefits did we get out of the capex? What is our capacity utilization? What can revenues look like at peak utilization?
  14. Are you developing any new products? Especially on Amino Acid chillets, it is a very promising area. Is it a big market for us?
  15. Details on Related Party Transactions please.

Investor Sanjay Periwal:

  1. Perspective on growth of Company
  2. How management plans to benefit the shareholders of the Company.

Investor Satya Prakash Mittal:

  1. Reasons for the growth in last 3-4 years. Key reasons for growth. Where do we stand in the Pharma and Food value-chain.
  2. We see lot of margin improvements. Thoughts on Sustainability of margins, and reasons for margin expansions. Where do you see Sustainable margins?
  3. What are the key 3-5 products and how much do they contribute to revenues? Who are the key clients? What is the demand scenario for the products? Who are the key competitors in this area?
  4. Export is small percent of our revenue? What are we doing to tap into this products?
  5. Great performance has come from TM Media. I would like to understand if TM media is part of stand-alone entity? What was contribution to revenues in FY20 and Q1-FY21? If I understand, we were making Viral transmission media in TM media. How is this space evolving? We must be seeing intense competition and price erosion. What was price Realization earlier and what are we doing now? Have we started making any products specifically for covid?
  6. We see we have done major Capex in FY18. What did we do? Did we expand capacity or introduce new products? What are our plans for Capex going forward?
  7. We have a subsidiary peptech biosciences. Can you please tell some information about what they do?
  8. Borrowing limit was raised. We are doing well, so why was it raised?
  9. We have sought approval for inter-corporate deposits, which are concerning since there is a risk they are not at fair value. Can management please provide rationale for that or restrict those transactions?
  10. We see promoter selling in open market. Some thoughts on that.
  11. Can management please conduct concalls once in 6 months so investors can understand business and be invested for long-term.
  12. Stock is illiquid. Can management please issue bonus shares.

NK Singla (MD, Titan Biotech):

  1. Started as a culture media manufacturing company in 1992. First company in India to manufacture Media bases and Formulated Culture Media from scratch.
  2. Continuously added products. Today we are dealing in biological products which find applications in microbiology, Nutraceuticals, pharmaceuticals, agriculture, Animal nutrition as well.
  3. Protein based ingredients form the bulk of our starting material. The process varies from Product to Product and processes are continuously improved. Our products are mostly intermediates. They do not qualify for one to step down. They are used as ingredients in Formulations. Processing aid in fermentation. Or Base for culture media. We do hydrolysis of our products. We do import certain ingredients like propionic acid. But products are not imported from any country with which India has any problems. We are importing agar agar as a raw material for culture media. Import value stands at 12.82 crores.
  4. We have competition from Various Industries (My guess, was not very audible). Dealing in ingredient manufacturing, diagnostic media, and lab chemicals. Due to wide range of products, we have various raw materials like agar agar, soya, casein, Margins are always market driven and variable and cannot be commented upon. Manufacturing processes differ product to product. Some have large batch sizes, some have small batch sizes. The time required for manufacturing also varies a lot by the type of type of product from a few hours to up to 72 hours.
  5. Peptech Biosciences is our subsidiary company and deals in Agro products. The balance sheet is uploaded on the company website. Sales and profitability has increased in recent years.
  6. There is lot of variety in our products from peptones, culture media and chemicals and ASP varies a lot depending on product to product and qualities sold. Prices are driven by market. As market trends change, we add new products and discontinue products where demand is not strong. The first plant of the company, built in 1994 has been completely refurbished in 2018. Constant upgradations are made to introduce new tech and keep up with best practices in industry.
  7. Increased demand in Q1 is pandemic related and should not be seen as permanent in nature. Culture Media And diagnostic division has contributed most in Q1FY21. Gross margins have increased due to increased demand for culture media for transfer of viral medium due to pandemic.
  8. The excess cash flow will be utilized by the company in working capital and also in doing capex. We’re analyzing the market forces and decisions will be taken on capacity expansions soon. We’re looking into forward integrations wherein we would supply formulative nutraceutical products as well.
  9. Regarding amino acids, we manufacture amino acid mixtures, chillads along with a mixture of zinc, magnesium, manganese, selenium, copper, iron etc. These find applications in plant and animal nutritions.
  10. Key growth drivers: addition of new products, constant cost monitoring has helped achieve good margins and growth. Culture media, nutraceuticals, food ingredients majorly to sales.
  11. In total we have export sales of 13.65cr and domestic sales of 55.83cr in FY20. We have distributors and direct customers in many countries.
  12. TM Media is brand name under which we are promoting our diagnostics related products and chemicals. Viral transport kits have found great acceptance due to Covid pandemic. We are encountering wide competition in this space as well. With new players entering the market it is hard to understand sustainable prices and orders. Demand and supply constantly changing. There are 2,000 culture media products company is manufacturing. The capex helped introduce new machines, which enabled us to acquire new clients, who audited our plants and were happy with it.
  13. Selling was done by a non-core promoter, someone who is not involved with day-to-day of the company
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great post. key for short term is vtm sales, in long run i am sure company likely to deliver good and consistent growth and one day it will be a sizable company, tracked by many analyst and investors. company got good cash flow, due to vtm and likely to use it accelerate growth. company should increase corporate communication like separate press release along with quarterly result and if possible an analyst con call. corporate communication and governance is the key of trust in management by investors.:+1:

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Viral Transport Kit

Let us understand the Viral Transport Kit and its impact on Titan Biotech.

Description

Here is a good link on tm media (titan biotech brand): https://www.tmmedia.in/sites/default/files/TMVT%20001_Viral%20transport%20kit_1.pdf
The intended use is for collection and transport of clinical specimen for recovery of viral agents. A Viral Transport kit is intended for the collection and transport of clinical specimens containing
viruses, chlamydiae, mycoplasmas or ureaplasmas from the collection site to the testing laboratory. It
is ready to use transport swab kit, designed to maintain viral viability and transport viruses in active
form for isolation. The peculiar design of the flocked swab ensures optimal elution of the specimen
into the transport medium. The kit comprises of one sterile flocked specimen collection swab and a tube of Viral Transport Medium. The viral transport medium contains essential buffers and antibiotics required for maintaining the viability of the viruses during transport. The medium is also recommended by CDC and WHO for collection and transport of Covid-19 virus.

Here is an ICMR guideline which validates the fact that they have indeed tested and recommend using TMMedia VTK as a standard solution for Covid-19 Sample collection:


(see Serial number 7 at https://www.icmr.gov.in/ctestlab.html). Note that this was issued 1/4/2020 and so for sure new VTKs would have been approved post that date.

VTK Price Movement

Ideally we would like to track the price movement of the VTK. However, this is not easily available. So, we instead track the price movement of the RT-PCR test, which has the kit as a component. Since both prices are driven by demand and supply, there should be proportional moves in prices of both. All the data is taken from Kilpest’s bse filings. Example: https://www.bseindia.com/xml-data/corpfiling/AttachHis/8c58e558-4afe-4d9f-8d97-6da6c62aa850.pdf

Month Price Volume
June 500 666000
August 325 422000
September 230 868000
October 172 909000

As we can, sww, the price has eroded 66% since June although volumes have gone up 50%. One can expect roughly similar price erosion and volume expansion (potentially) for Titan Biotech as well.

Impact on Revenues This FY

From the Q2-FY21 filing, out of 27cr revenue in Q2, 7.5cr was due to covid-19. For the Q1-FY21 filing, out of 39cr revenue in Q1-FY21, break up due to covid-related revenues is not given. The Q1-FY20 Revenue was 22cr. This is an almost 90% rise in revenues. Company mentions in filing that a lot of revenue increase is due to covid specific demand (for VTKs).

Valuation Estimation

Disclaimer: What follows is my estimate for sustainable NP increases in FY21. As with all estimates, this estimate is incorrect. I hope it proves to be useful though.
Q2-FY20 revenue was 16cr. So, the sustainable revenue growth in this Quarter was 25%. 36% of revenue increase was sustainable. Net Profit increased from 1.34cr 6.78cr in Q2. Due to operating leverage let us assume that only 10% of NP increase was sustainable. This works out to 0.54cr. This implies NP increase of 0.54cr (40%). Note that this number is very close to the 5-year CAGR of the NP as outlined in first post on the topic. If we assume a similar NP increment over entire FY, then sustainable NP for FY21 would be ~10cr. With a median P/E of 12, the P/E based median valuation is 120cr for End of FY21. Current marketcap is 110cr, so there is very little margin of safety.
As the Q3 and Q4 results show a lower QoQ growth, I would expect stock price to be under pressure, and hence for the margin of safety for the purchase price to go up. This might present an informed investor with a good buying opportunity.

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Q3 - FY 21 (Dec-2020) revenue was 31 Cr out of which 8.5 Cr was due to COVID related sell. It is again 25% growth over corresponding quarter last year (Dec’2019). So above valuation holds true although market cap has increased to 140 Cr. More importantly promoters have bought ~37K shares in 4 tranches. Is there some part of story which is missing here?

Also median PE is 12 for titan biotech. What about PE of similar companies? I could not find another companies with similar market cap in this space. But PE of 12 looks highly under pitched.

They also have nil debt if we consider 8 Cr cash vs 8 Cr debt on their books. So if they can find some good expansion opportunity, they have a long rope.

There are many “IFs” in above analysis. I am just trying to understand reasoning behind promoters confidence.

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Continuous promoter buying for the past few days. with TTM PE of 35, stock is trading at 5PE which looks cheap if we compare to advanced enzymes, nearest competitor.

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Can experts throw some light why it has not been recognized by the market? The past couple of quarters results have been nothing short of outstanding yet the stock has gone nowhere in last 5-6 months.

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Looks like one of the promoter associate is selling continuously and other promoter is buying.

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I feel that the constitution of the Board does not instill confidence. Even the concall was not impressive.

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The CFO of the company recently came out of a heart attack (as mentioned by the company) while trying to reach out to him - do they not have to disclose this kind of vital information on the exchanges?

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What is wrong with the stock price?

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@sahil_vi - Brilliant analysis on Titan Biotech. It has been popping on my various #screeners for quite some time. Recently it made a long stride.

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I was listening to the concall and i was amused by the way the call was conducted, allowing a shareholder to read through all the questions taking 15 mins which he had already sent. And once all this was done, the anwers to me were very generic without any numbers and firm guidance and seemed they were pre-planned depending on when they recieved the question, from being optimistic about the company i just lost it midway and closed it. Only future will tell if i would have to regret later :grin:

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Did anyone attend yesterday’s AGM? If would be great if someone can share the updates.

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Any idea why the stock is getting hammered? Am I missing any important news?

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Last quarter results were not good enough. I guess current market sentiments adding more to the fall.

In my opinion, results were good after considering covid related revenue was down from ~7 Cr to ~1.5 Cr which was expected.

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Yes results were good… non covid revenue is growing qoq and yoy… its matter of time for it to get rerated…lets see

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Any analyst report on titan biotech? can someone share?

For those who’ve invested in the company, can you please answer the following questions?

  1. WHo are the major clients of the company. Does the company have any long-term contracts?
  2. Any high dependence on a key Raw Material? ( I know agar agar and propionic acid are imported but not sure if those are key raw materials) Also any long-term contracts with the supplier? I am just making sure that the margins are not drastically impacted if any of the RM prices shoot up as MD mentioned that the company is a price taker.
  3. In concall MD mentioned that the key growth driver is to add more and more products to the portfolio. I am not sure how convenient and sustainable it is to keep switching product portfolios.
  4. Also, any main competitor apart from Advance enzymes?

I tried searching for the answers in the concall and annual reports but that was a waste of time. All the answers given by MD were very generic and annual reports don’t have any details.

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