Thursday, August 24, 2006

Update: New investment - Ankur Drugs & Pharmaceuticals

grI recently wrote about my new investment: Ankur Drugs & Pharmaceuticals. Here's a small update that further reiterates my belief that the company is headed for good times. The promoter of this company - Purnandu Jain has been an active buyer of his company's shares in the recent months. The quarterly shareholding pattern available for this company on the BSE indicates this. Check these links 1,2 and 3.

Promoters buying shares from the secondary market is a fairly strong signal. This is because unlike selling , buying is a voluntary decision. People can end up liquidating some of their holdings for reasons like buying a new house, repayment of some loan, etc. The bottomline is selling can be a forced decision. Whereas buying shares (making investments) is mostly voluntary, unless you are a large steel manufacturing company. Noteworthy is the fact that pple make investments only when they think that the investment they are making is the one that CAN yield the highest return for them at a reasonable risk.

Therefore, I for one am quite bullish over the fact that Ankur Drugs is a). recording robust growth in its business and b). the promoters in the company too feel the same. Not just promoters, Reliance Capital (one of the largest and best performing mutual funds) too feels the same. It picked up a 9.5% stake in Ankur Drugs in November last year.

Disclosure: I've a long position in the company bought at Rs.92 per share. I bought these 2-3 days prior to my blog entry on this company. The stock has since moved by over 45% and is currently trading at around Rs.137. I expect the company to report a PAT of over Rs.20 crore for the fiscal 2007. Discounting this by a multiple of 8-10 times gives me an approximate price target of Rs.180-200 per share.

More updates: Dilution of equity due to the conversion of FCCBs

I had done some rough computations on the likely effect of the conversion of the 16,000 FCCBs (amount: USD 16 million) issued by the company in May this year. Here's how they look:

1).Assuming the FCCBs get converted at a price of Rs.100 per share.

2).No. of additional shares would amount to around 7.4 million shares.

3).Current shares outstanding is 9.5 million.

4).Shares o/s post the conversion would amount to 16.9 million.

5).With a NPAT of Rs.42 crore (as claimed by the company's head), year end EPS would stand at Rs.24.9 per share.


Anonymous said...

I think Ankur is a very good pick .I have been having it from 30 levels in a small quantity.
You may also look at this emerging giants like ANG exports CMP 300 ,EPS for 2007-08 could be close to 50.
Also Chordia Food Products which has diversified into food technology park and Karuturi Networks which has huge plans in floriculture business.
Both these companies have close to 100 plus acre land near Pune and Bangalore respectively

deepinsight said...

Some news you could use below...Not much analysis on the company's long term growth sustainability. Can you share some details on the growth prospects?


Ankur Drugs' Rs 135 cr Baddi plant expects to go on stream shortly
Tuesday, August 22, 2006 08:00 IST
Usha Sharma, Mumbai

Ankur Drugs and Pharma Ltd, a leading player in Contract Manufacturing, is going ahead with a major expansion programme to cater the domestic as well as international clients. The company invested Rs 135 crore for its new manufacturing facility at Baddi (HP). The construction work of the facility is already over and the plant is likely to commission shortly.

While talking with Pharmabiz Girraj Vijayvargiya, director, said, "We will start manufacturing in Baddi within couple of months. We have imported machinery from Germany and Italy. for the injectable product". In addition to traditional products, the company will also undertaking manufacturing of injectables. "Recently we have undertaken contract manufacturing for Sandoz. We are doing contract manufacturing for leading Indian players like Ranbaxy, Cipla, Cadila, Lyka, Wockhardt, Glenmark, and Torrent," he added.

Baddi plant is being set up as per US FDA and UK.MHRA standards. "We are expecting approval from regulatory bodies which will boost our contract manufacturing activity for MNCs" added Vijayvargiya.

Currently, Ankur has capability to produce 250 pharmaceutical products. The company is producing Cephalosporin tablets, capsules, dry-syrups, liquids, and ointments at its Ankleshwar plant in Gujarat. Its Baddi plant will undertake production of sterile products for the first time to meet the demand of domestic as well as international market. Ankur is focusing more on the Anti-bacterial sectors, generics, and Cephalosporins

Ankur has issued $ 16 million Foreign Currency Convertible Bonds (FCCBs) to part finance Baddi plant.

Ankur has commenced operations of small R&D facility at Daman, which will help to reduce cost of existing formulations.

Ravi Purohit said...

The company's growth prospects look fairly good. Even before this new plant is comissioned, the company's topline grew at a scorching pace (100%+) during the March and June 2006 quarters. Besides, the fact that company set-up its plant at Baddi makes it a good candidate for doing a lot of contract mfg work for other pharma companies. Baddi offers significant tax benefits to companies setting up new facilites. I think this will hold Ankur in good stead in terms of its competitiveness vis-a-vis several other small contract mfg companies.

Infact in one of the intervies(or artciles), I recently read that Ankur is likely to become of Rs.400crore+ company by the end of FY07. What else can explain the promoter buying over 1.5 lakh shares from the open market over the past 3-4 months. Reliance Capital too is the only fund house to have picked up a stake in this co. I find all these as good suggest the direction of Ankur's share price.

deepinsight said...

Disclosure: Have also taken an exposure around Rs. 130

The discussion here is if this good company can be a great company and therefore an investment with multi-fold returns.

Also if we can bring enough depth in our discussion to build conviction to make Ankur a substantial part of one’s portfolio.

My own assessment so far is that management has proven itself to be good, by acquiring blue chip customers that they have the ability to sell and execute (through manufacturing). Recent acquisition and scaling up of its facilities shows foresight and some vision. No clarity on depth of management to pull of multi-fold expansion.

The business model is decent as it’s a beneficiary of a trend in outsourcing of contract manufacturing. The margins are ok but not great. Probably there are more alternatives (competitors). So competitive advantage is more a function of reputation, capacity and execution. The model will also be capital intensive (requiring new capacity for new expansion) also putting pressure on margins.

Valuation: The recent business momentum, new capacities, management buying its own shares and present valuation give some “margin of safety”. At 6-7 times 07 earnings it’s a decent buy. I am trying to build conviction by substantiating the business, understand sustainable competitive advantage that could make it a screaming buy.

deepinsight said...

The CEO's interview in CNBC in Feb 06 talks about profits for the consolidated entity of 42 crores. That's quite different from your expectation of 20 crores profit. (half).

Have you also taken into account dilution from the FCCB and the larger rquity base because of the acquiistion (Vaibhav) to come to your per share earnings target?

Thanks for more depth.

Net profit to be around Rs 42 cr in FY07: Ankur Drugs

Ankur Drugs net profit has dipped on account of higher tax provision. The growth was also static during the quarter. The company has raised some capital through its FCCB, which its CMD Purnandu Jain says, will be used for their Baddi project.

Looking ahead, he says that the company will clock in net profit of Rs 42 crore in FY07. But the exports, he adds, will start only in 2007-08.

Excerpts from CNBC- TV18's exclusive interview with Purnandu Jain:

Q: If you could take us through your growth drivers for this quarter?

A: This quarter the growth has been static. It is almost equivalent to the last quarter, but the net profit has gone down because of higher tax provision. We are declaring audited results this quarter. So tax provision has gone up by almost Rs 100 lakh.

Open: 2/Feb/06
Close: 2/Jan/06
% Change

Ankur Drugs
Rs 158.5
Rs. 164.80
3.82% Down

Q: Why would you have declared this as your audited profits?

A: We are merging one of our associate concerns Vaibhav Healthcare Private Ltd. December 31 is the date of merger.

Q: Are these profits, the post merger numbers?

A: These are not post merged numbers. These are separate Ankur Drugs numbers.

Q: Can you give us an idea how the post merger numbers will look after Vaibhav Healthcare becomes a part of Ankur?

A: Whatever turnover has come in this quarter, the goods have been actually manufactured by Vaibhav Healthcare only on a job basis for Ankur Drugs. Vaibhav has earned only job work. 80% of this turnover has come from Vaibhav only.

Q: What is the EPS at the end of nine months and how would it look after you add the Vaibhav balance sheet to yourself?

A: The EPS for nine months is Rs 6.48 and after merger it should be around Rs 10 – Rs 11.

Q: Coming to your Baddi expansion when does it actually start kicking in and when does the expansion get over?

A: This will happen in April.

And BUZZ before it becomes NEWS
Only on

Q: So what kind of sales and EPS growth do you expect in FY07?

A: The total consolidated sales would be around Rs 450 crore.

Q: You also took an initiative recently to raise some capital through FCCB. Could you tell us what are you going to use these funds for?

A: We have changed the scope of the Baddi project of Ankur Drugs. Therefore, we require additional capital. We have decided not to borrow rather go for FCCB.

Q: How much of your capital will get diluted by the FCCB?

A: I would not like to comment on it at the moment.

Q: What will be your EPS growth in FY07?

A: It will be around Rs 42 crore post-tax profit earnings. The net profit will be Rs 42 crore.

Q: What is your export growth likely to be in FY07?

A: There will be no exports in FY07. It will start from 07-08 because all the necessary approvals will come in 2007 –08.

Ravi Purohit said...

Deepinsight: The profit number that I wrote was based on the company's standalone performance. It is extrapolated from what the company has reported thus far. But, if the company is able to achieve what its management claims it will during fiscal 2007, then there is a good chance of further upside from my earlier target of Rs.180-200 per share.

With Rs.42 crore in net profit, and a discounting of 10 times earnings, the price target can be moved upto as high as Rs.250+, an upside of around 100% from here on. (This includes the effect of the dilution due conversion of the FCCBs).

Btw, I had done some rough computations on the likely effect of the conversion of the 16,000 FCCBs (amount: USD 16 million)issued by the company in May this year. Here's how they look:

1).Assuming the FCCBs get converted at a price of Rs.100 per share.

2).No. of additional shares would amount to around 7.4 million shares.

3).Current shares outstanding is 9.5 million.

4).Shares o/s post the conversion would amount to 16.9 million.

5).With a NPAT of Rs.42 crore (as claimed by the company's head), year end EPS would stand at Rs.24.9 per share.

deepinsight said...

If we are lucky the conversion price of the FCCB will be higher (closer to Rs.150) and therfore lower dilution.

Also on the expanded equity base now we are more aggressive in our calculations of earnings (42 crores versus 20 crores initially forecasted). If they miss on the earnings of 42 cr. to say 30 cr. EPS may be substantailly lower. In other words I feel a bit exposed.

The question I would like addressed is- does the company have any seeds of "long term competitive edge" which would allow us to hold it for more years? - say 3 years while the company maintains its net margins.