I am confused about this stock and have a tracking position.
Pros for investment:
- Zydus/Cadila is an Indian pharma firm, therefore devoid of any drama with the MNC pharma stocks that pay huge dividend/royalty to their MNC parents.
- Gujjubhai Patel run company. Patels know how to do good business and blessed with astounding business sense and are clean honest people. All good signs like 0 debt, 30X returns in 20 years and 3X returns in 10 years and sales is 3X in 10 years
- 37 Plants producing formulations, APIs, vaccines, animal health, biologics, research & development, contract manufacturing, wellness (food and cosmetics) etc.
- Who does not Glucon D, Nycil and Complan? Company is home to these brands as well as Nutralite. What the heck - they even produced a Covid-19 vaccine
- Spends close to 10% annually on R&D. Not a commodity player. This is seen by its launches in USA and Europe with 180-day exclusivity and Day-1 launches. Further it is only 55% into generics and rest is on new chemical entities, biologics and vaccines. Triggers for growth can be Saroglitazar and Desidustat, which are on sale in India
Cons:
- Very poor sales growth in the last 5 years in single digits at 8.23%
- P/E ratio is 25 which means poor margin of safety considering the stock traded at 10 P/E 2 eyars go
- Adverse observation on their plants
I think this is a good stock to load but not convinced on valuations still. I plan to increase my tracking position, when there is a trigger like poor adverse observation on plants and stock presents a -20% down from current price, offering margin of safety
Sales growth:-
- They sold their animal health portfolio in FY22 to focus on human health
- Indian pharma business was not growing much during those times, it has improved only recently, reason possibly is the shift in business strategy led by innovation and R&D to introduce new products with high margin which focus more on bottom-line that’s why the sales growth looks less historically. Going forward expect 15% topline and 20% bottom line growth in pharma business.
For Valuation:-
Median PE is 23 for last 5 and 10 years. So it is reasonably priced considering peers valuations which varies from 18 to 35.
Adverse observation:-
These get resolved eventually, nowadays even the price does not correct much on getting negative observations. In past such FDA observations caused significant price corrections for pharma stocks and allowing people to load up. It still might cause price correction for small players but larger player have multiple plants so one plant getting observation does not cause significant impact on product launches.
The unknown is the ongoing litigation in mirabegron and the eventual outcome. Any negative verdict may impact in short term, and might give an opportunity to accumulate.
This is just opinion. Please do your own research.
Great points. I think buying lower gives good margin of safety. At high P/E risk is too high like all the Marcellus stocks