To understand this company better, one needs to understand Excipients.An excipient is a pharmacologically inactive substance used as a carrier for the active ingredients of a medication. The need for an excipient arises because some active ingredients may not be easily administered and absorbed by the human body - that’s where an excipient comes into play - the ingredient maybe mixed/dissolved with an excipient. Excipients are also used to allow for convenient and accurate dosage/release and to keep the flavour/taste. They stabilize the active ingredient and ensure that the ingredient stays active and stable for sufficiently long time. Excipients are of many types, including coatings, binders, fillers, lubricants, preservatives, etc. Based on the form of medication and route of administration different excipients may be used - for example, tablets and capsules are used for oral adminstration. However, they are used when absolutely necessary and in the smallest amounts possible - it should come as no surprise that the formulation of excipients is usually considered a trade secret.
Vikram Thermo wants to become one of the world’s largest pharma excipient manufacturers. They are a manufacturer, marketer and exporter of various pharmaceutical excipients, and provide solutions in Film Coating / Enteric coating and Sustain Release / Control Release formulations to pharma industry. The company has two product categories:
1). Diphenyl Oxide (DPO): The company started its business in 1984 at Chhatral, near Ahmedabad with the launch of DPO. Over the past few years, it has increased its capacity to about 840 tons p.a. DPO has following applications: in heat transfer fluid; reaction solvent in the manufacturing of API and as perfumery compound in cosmetics.
2). Drugcoat (Methacrylic acid copolymer): In addition to DPO, the company also started the production of its Drugcoat line of products that is basically a polymer used in tablet coating for enteric/film coating. It is also used for sustained release, transpareng coating, moisture barrier coating, etc. Variants of Drugcoat are used based on the requirements - solid dosage, liquid dosage, high pH, low pH, all pH, etc.In Drugcoat, the company has a capacity of 1200 tons (liquid) and 120 tons (solid) p.a.
Production: While in the early years of the business, most of the company’s products were imported. But today, with its own R&D, the company produces nearly 94% of the products indigeniusly. The rest 6% is imported. The quanity sold in FY11 and FY10 by product categories:
Drugcoat: FY11: 1535 tons, FY10: 1147 tons
DPO: FY11: 903 tons, FY10: 788 tons
The numbers suggest that the calacity utilization has been above 100%.
The industry size is unknown to me, so not clear what % of the market they command, but given the products, i.e. pharma coatings, etc. it could be a multibillion dollar industry.Names of their clients/percent of sales by clients are not available.
The key raw materials (petrochemicals) for the company are caustic soda, methacrylic acid, ethyl acrylate, phenol and mono chloro benzene.
Summmary financials: Currently trading at ~40/share (mcap of 22crores), with net profit in FY12 of 5.5crores (eps of 9.92; implied ttm pe of 4). Debt free with RoE ~ 37% (increasing in the past 5 years), consistent dividend payer, with last yr div of 1.5/share (implied yield of 3.75% at cmp and payout of 15% using FY12 eps). Sales and PAT up by over 2.5 times and 3.6 times in the past 5 years. Price to Sales of about 0.6 times. Price to Book of about 1.2 times. Promoters have been increasing their stake (up to 56.44% in Mar12 from 53.32% in Mar11).
Risks/potential areas of concern: Fluctuation in petrochems is a risk to the company. Being a microcap, bears the risks of low traded volumes (although the volumes have gone up post FY12 results). Other risks could arise from unknowable events related to products being banned, industry headwinds, regulatory risks, labor risks, etc. Its clients, their growth rates etc. are not known, so there is a potential risk (unknown as of now) associated with loss of business.
Conclusion:Over the past 28 years, Patels have created an interesting business and are aiming to make Drugcoat one of the largest brands in Excipients. The nature of the business is competitive and it doesn’t seem like one can win a client just like that - as such, the business has high competitive barriers, and the company has competitive advantage that comes from the decades of business, experience of the promoters and local R&D. However, as of today, I dont know who their top customers are and how much ghey contribute to the business. The company has done well in terms of sales/profit growth, RoE/RoCE and being debt free is another plus. The company was available at around 32/share before the results were announced ( and at a steep discount to earnings as suggested by the price vs ltm earnings chart for the past few quarters), but ran upto 43.8/share in 4-5 sessions with increase in volumes (and delivery %). Dividends have been consistent, and the yield is decent. Promoters increasing their stake is a positive sign.While all of this has been rewarded partially by the market, 4x p/e seems cheap for such a business. With improving business and financial performance, the stock is likely to continue the journey upwards.