We had first recommended Shilpa Medicare to be accumulated between Rs 260 - Rs 275 in January 2014. Based on ProsperoTree's analysis we came out with a report titled "Shilpa Medicare: Riding on Cancer Medicines" that tried to explain the reasons for the investments. We recommended buying again at all prices -Rs 285, Rs 309 and Rs. 420.

Last week we met with Shilpa Medicare MD, Mr. Vishnukant Bhutada at Raichur and are further enthused about the business prospects. The emerging clarity from the meeting makes us think that Shilpa Medicare at the CMP of Rs. 558 still offers a very good long term reward as compared to the associated risks.

Based on our interaction and understanding of the business, we have summarized the major engines of long term growth for Shilpa Medicare as below:

Shilpa Medicare: Multiple Engines for Profitable Growth

Segments    Current Status   Future Potential / Activity

Oncology API (FY14 Rs. 200 crores)    Shilpa majorly sells Oncology API to companies who sell European (EU) market.    1. Shilpa is waiting for API plant approval from USFDA; 2. Post this, sales can increase dramatically as US market is very large & customers are ready to buy; 3. Shilpa is also making its way into Mexico, Brazil, Japan, Australia, Korea, etc.

Anti Retro-Virals (Nil Revenue so far)    License for 5 ARV products taken from Gillead to sell API as well as formulations.    1. Company will start with first ARV API in FY16; 2. The formulation also lined up; 3. The full ramp-up of same to come by FY17

Formulation (FY14 Rs. 25 crores)    Plant fully ready; Capex completely done; Application for products to US, Europe, Mexico, etc done.    1. Inspection from various countries FDA lined up; 2. Mexico FDA audit done with no observations; 3. Large revenues from Fomulations in FY18; 4. Shilpa margins to improve substantially

ICE JV / Custom Synthesis (FY14 Rs. 200-225 cr)    All sales done here to single client. Good relation with client led to a Joint Venture in India.    1. Sales to ICE are currently booked in standalone; 2. However, it will be shifted to 50:50 JV by FY17; 3. Margins from ICE JV to be higher; 4. Increased volumes leading to no loss of revenues to Shilpa after minority interest

Non-Oncology API (FY14 Rs. 77 crores)    Some products where Shilpa is specializing other than Oncology are produced.    1. We don’t expect it to do anything good; 2. Our expectation is of single-digit growth

Loba Feinchemie    No a focus area    

1. We don’t expect it to do anything good;
    
2. Break-even is our expectation

On a consolidated level, Shilpa has clocked in a revenue of Rs. 570 crores with a total profit of Rs. 75 crores. The company has incurred a capital expenditure worth Rs. 400 crores in the last 4 years and will spend another Rs. 200 crores in the next 3 years. The benefits of this large scale capacity creation, R&D spending, and long term strategy will accrue to investors only in the long run. At the CMP of Rs. 558, it's market cap is worth Rs. 2153 crores. Though the valuation looks quite steep at 28 times FY14 earnings, we are confident that Shilpa's profit can rise multi-fold in the next 3 to 5 years and the current market price in that context provides significant upsides for the long term investor. 

The journey will ofcourse be volatile as a lot depends on the regulatory approvals coming on time for Shilpa Medicare (esp. USFDA).

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