Name    1st Reco Date    1st Reco price    Target    Prospero Rating    Report Date*
Shilpa Medicare    29Jan2014    Rs. 272 (Post Split Price Rs. 136)    Rs. 500    9 / 10    14Feb2014
We had first recommended Shilpa Medicare to be accumulated between Rs. 260 - Rs. 272 in January 2014.

A) Company background:

Shilpa Medicare based in Raichur, Karnataka recorded FY13 sales of Rs. 371 crores with a PAT of Rs. 47 crores it operates in 3 major segments:

1. Custom Synthesis (40%): Shilpa manufacturers APIs for Italian companies at a fixed margin and has a long term contract for the same. Based on FY13 numbers, this segment contributes nearly 40% of the sales.
    
2. Oncology API (40%): Shilpa produces specialized Oncology APIs for its selected clients majorly based in Europe and India. The company has already done around 7-10 filings in the European region. This is the biggest focus area of the company and is also a high margin API business with tremendous scope. In FY07, this division alone contributed to 15% of sales.
    
3. Non Oncology API (20%): Shilpa also produces certain non-oncology based APIs which are limited in competition. Most of these APIs are also sold to clients having long term supply contracts. Ambroxol is the biggest non-Oncology APIs for Shilpa.
    

B) Revenue segmentation:

*So far the company has not been selling any formulations in any country. However this profile is changing. In 9mFY14, the company has registered a growth of 48% in sales to Rs. 403 crores and a growth of 43% in profits to Rs 50 crores.
 

C) Investments arguments: 

1. Long term product pipeline: Shilpa Medicare is one the leading manufacturer of Oncology products in India. It has created a strong pipeline of API filings for all cancer drugs that are set to expire in the next 5 years. The company has filed for 14 products in the US markets and is adding more, most of which are currently under the patent regime. These same products are also being filed in other regulated markets of Europe, Japan, etc. Even in the non-oncology space, the company is building capacities in niche products where the markets size is substantially large. Some of the major products of Shilpa Medicare are Ambroxol, Buflomedil, Oxaliplatin, Gemcitabine, Ticlopidine, Busulfan, and Carboplatin among others.
    
2. Planned entry into US and Japan: Europe and India comprises 75% and 25% Shilpa Medicare’s revenues respectively. However, the company has been long planning to enter into the regulated markets of the USA and Japan. The company has already filled for 14 APIs in the US market and is now waiting for the plant approval for its API units. In a similar manner, the company has received approvals for its certain plants from the Japanese authorities and is at a very advanced stage of discussions with certain customers. The US market itself could garner 2x-4x of its existing revenues from Europe. Apart from the 3 major markets, the company has been also planning to sell in other markets like Korea, Australia among others.
    
3. Forward integration through formulation foray: The company is also undergoing forward integration with its entry into the formulations business. To support the formulation business, the company -
   
   a) is preparing ANDA pipeline and plans to apply 12-15 ANDA in the US market in FY15
   
   b) is in talks with various existing API customers to get tie-ups on the formulations side.
    
4. Substantial capacities already ready; more capacities to follow: Shilpa has been consistently investing in building capacities. The company already has 3 API plants, 1 formulation plant and 2 major R&D centres with small commercial capacities. The formulations plant has been recently built and is not contributing any revenue so far. The company is further increasing capacities by adding more blocks in the existing API plants and may add 2 more plants in next 3-4 yrs.
   Strong balance sheet and conservative management: Apart from the small ECB loans of Rs 40 – 50cr, the company does not have any debt and the balance sheet and the cash flow generation of the company is quite strong. The management is also quite conservative in choosing customers and incurring capex.
    
5. Short term positive triggers - 
   
   a) Large existing oncology customer base to increase API orders
   
   b) API plant approval from USFDA expected soon (Unit I & Unit II)
    
6. Valuations: At our recommendation price of Rs 260 - 272, the company is trading at a market cap of Rs. 979 crores. In 9mFY14, the company sales grew by 48% to Rs. 403 crores and its profit grew by 43% to Rs. 50cr. We expect the company’s performance to continue at a strong run-rate in next 2-3 years on back of its entry into high potential US market, traction in the European market and strong order visibility from the Japanese markets with further upsides coming from its joint ventures and other subsidiaries. The company should post a minimum profit of Rs 65 crores in FY14. Though the price to earnings multiple at 15-18x looks expensive for an API player, its growth promise, conservative management approach, product pipeline and entry into formulations markets gives us a strong comfort to hold Shilpa Medicare for long term. We strongly recommend BUYING at current price.
    

D) Key risks

• Attrition of existing clients
   
• Delays in getting plant approvals
   
• Apart from the business strategies, the fortunes of a Pharma company like Shilpa Medicare majorly depend on certain regulatory approvals from the regulated markets of the US, Japan and Europe. We believe that we can only make reasonable assumptions about these approvals and can never be 100% sure on any of these approvals. Our target price is based on these certain approvals where we are pretty confident.
   

*Report Date may sometimes be different from Recommended Date.

Share On