BUY CMP 214.00 Target Price 240.00 AARTI DRUGS LTD. Result Update: Q2 FY14 JANUARY 6 th 2014 ISIN: INE767A01016 Index Details Stock Data Sector Pharmaceuticals BSE Code 524348 Face Value 10.00 52wk. High / Low (Rs.) 262.00/129.30 Volume (2wk. Avg.) 4725 Market Cap (Rs. in mn.) 2591.54 Annual Estimated Results (A*: Actual / E*: Estimated) YEARS FY13A FY14E FY15E Net Sales 8257.50 9702.56 11060.92 EBITDA 1203.30 1455.38 1692.32 Net Profit 452.34 593.55 716.90 EPS 37.35 49.01 59.20 P/E 5.73 4.37 3.61 Shareholding Pattern (%) 1 Year Comparative Graph AARTI DRUGS LTD S&P BSE SENSEX SYNOPSIS Aarti Drugs Ltd engages in the manufacture and sale of bulk drugs and its intermediates in India and internationally. The company s net profit registered 18.31% increase and stood at a record Rs. 137.60 million from Rs. 116.30 million over the corresponding quarter last year. The company achieved a turnover of Rs. 2479.50 million for the 2 nd quarter of the current year 2013-14 as against Rs. 2164.00 millions in the corresponding quarter of the previous year. The company has reported an EPS of Rs. 11.36 for the 2 nd quarter as against an EPS of Rs. 9.60 in the corresponding quarter of the previous year. Total expenditure in Q2 FY14 was Rs. 2195.80 million as against Rs. 1932.30 million in Q2 FY13. Aarti Drugs Ltd has declared Interim Dividend of Rs. 3.00 per equity shares of Rs. 10/- each for the financial year 2013-2014. The company has a distinguished clientele of MNCs viz. Sanofi Aventis, Merck, Teva, Searle, Pfizer, Bayer and Clariant and others. Net Sales and PAT of the company are expected to grow at a CAGR of 18% and 47% over 2012 to 2015E respectively. PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%) Aarti Drugs Ltd 214.00 2591.54 37.35 5.73 1.25 50.00 Claris Lifesciences Ltd 202.45 12955.00 13.29 15.27 1.38 20.00 Shasun Pharmaceuticals Ltd 87.00 4923.40 4.81 18.08 1.73 75.00 Aurobindo Pharma Ltd 395.25 115610.90 21.67 18.32 3.93 150.00
QUARTERLY HIGHLIGHTS (STANDALONE) Results updates- Q2 FY14, Aarti Drugs Limited engages in the manufacture and sale of bulk drugs and its intermediates in India and internationally has reported its financial results for the quarter ended 30 SEP, 2013. Months SEP-13 SEP-12 % Change Net Sales 2479.50 2164.00 14.58% PAT 137.60 116.30 18.31% EPS 11.36 9.60 18.31% EBITDA 352.00 295.80 19.00% Aarti Drugs Limited achieved a turnover of Rs. 2479.50 million for the 2 nd quarter of the current year 2013-14 as against Rs. 2164.00 millions in the corresponding quarter of the previous year. The company has reported an EBITDA of Rs. 352.00 millions and a net profit of Rs. 137.60 million against Rs. 116.30 million reported respectively in the corresponding quarter of the previous year. The company has reported an EPS of Rs. 11.36 for the 2 nd quarter as against an EPS of Rs. 9.60 in the corresponding quarter of the previous year. Break up of Expenditure During the quarter Total Expenditure rose by 14 per cent mainly on account of increase in Cost of Material Consumed along with consideration of Depreciation in the rupee impact. Total expenditure in Q2 FY14 was Rs. 2195.80 million as against Rs. 1932.30 million in Q2 FY13. Purchases of Stock in Trade cost are Rs. 256.40 million against Rs. 238.70 millions in the corresponding period of the previous year. Other Expenses was at Rs. 330.70 million and Material Consumed Cost is Rs. 1645.30 millions in Q2 FY14 are the primarily attributable to growth of expenditure. Latest Updates Aarti Drugs Ltd has declared Interim Dividend of Rs. 3.00 per equity shares of Rs. 10/- each for the financial year 2013-2014.
COMPANY PROFILE Aarti Drugs (ADL), incorporated in 1984, is engaged in the business of manufacturing generic bulk actives, advanced intermediates and specialty chemicals. Aarti Drugs Limited (ADL) has a strong regulatory framework and cgmp level documentation which is becoming a standard requirement of most of the big Indian pharmaceutical companies. High process efficiency and high standard for quality has created good brand name for ADL in the space of Anti-biotic, Anti-diabetic, Antifungal, Antidiarrheal, Anti-inflammatory and Antihypertensive therapeutic segments. ADL facilities are cgmp approved with certifications like USFDA, WHO GMP, TGA and ISO. ADL is constantly growing its presence in regulated markets by offering series of products from its USFDA; TGA certified plants, as well as Japanese accredited plants. ADL also has ANVISA certification of Brazilian authorities and COFEPRIS of Mexican authorities to cater to Latin American market in three of its major products. The drug major has received ISO 9001:2000 certifications for quality management. ADL's products are exported to over 85 countries across the globe. It has received Export House Status recognition of from Government of India. The company has clientele namely Sanofi-Aventis, Merck, Teva, Searle, Pfizer, Bayer and Clariant to name a few.
FINANCIAL HIGHLIGHT (STANDALONE) (A*- Actual, E* -Estimations & Rs. In Millions) Balance Sheet as at March31, 2012-2015E FY12 FY13 FY14E FY15E EQUITY AND LIABILITIES: Shareholders Funds: Share Capital 121.10 121.10 121.10 121.10 Reserves and Surplus 1643.70 1955.00 2548.55 3265.45 a) Net worth 1764.80 2076.10 2669.65 3386.55 Non-Current Liabilities: Long-term borrowings 669.20 807.00 823.14 842.90 Deferred Tax Liabilities [Net] 244.70 275.10 302.61 326.82 Other Long Term Liabilities 77.10 100.30 103.31 106.41 Long Term Provisions 0.00 28.60 61.49 76.86 b) Long term liabilities 991.00 1211.00 1290.55 1352.98 Current Liabilities: Short-term borrowings 2055.70 2149.80 2687.25 3117.21 Trade Payables 937.90 1318.90 1450.79 1595.87 Other Current Liabilities 286.60 302.40 393.12 471.74 Short Term Provisions 90.20 138.90 251.57 327.04 c) Current Liabilities 3370.40 3910.00 4782.73 5511.86 Total (a+b+c) 6126.20 7197.10 8742.93 10251.40 ASSETS: Non-Current Assets: Fixed Assets 2765.30 3038.20 3585.08 4051.14 Non Current Investments 69.20 51.30 51.30 51.30 Long Term Loans and Advances 22.70 25.60 157.44 196.80 d) Non-Current Assets 2857.20 3115.10 3793.82 4299.24 Current Assets: Current Investments 0.00 0.00 0.00 0.00 Inventories 979.10 1409.20 1902.42 2435.10 Trade Receivables 1806.00 2156.70 2544.91 2977.54 Cash and Bank Balances 49.40 28.80 29.38 29.96 Short Term Loans and Advances 271.50 196.00 215.60 232.85 Other Current Assets 163.00 291.30 256.81 276.72 e) Current Assets 3269.00 4082.00 4949.11 5952.17 Total (d+e) 6126.20 7197.10 8742.93 10251.40
Annual Profit & Loss Statement for the period of 2012 to 2015E Value(Rs. mn) FY12 FY13 FY14E FY15E Description 12m 12m 12m 12m Net Sales 6653.60 8257.50 9702.56 11060.92 Other Income 0.00 0.00 0.00 0.00 Total Income 6653.60 8257.50 9702.56 11060.92 Expenditure -5862.50-7054.20-8247.18-9368.60 Operating profit 791.10 1203.30 1455.38 1692.32 Interest -226.70-280.40-316.85-348.54 Gross profit 564.40 922.90 1138.53 1343.78 Depreciation -242.20-259.80-275.39-286.40 Exceptional Items 0.00-4.36 0.00 0.00 Profit Before Tax 322.20 658.74 863.14 1057.38 Tax -97.60-206.40-278.80-340.48 Profit After Tax 224.60 452.34 584.35 716.90 Extraordinary Items 0.00 0.00 9.20 0.00 Net Profit 224.60 452.34 593.55 716.90 Equity capital 121.10 121.10 121.10 121.10 Reserves 1643.70 1955.00 2548.55 3265.45 Face value 10.00 10.00 10.00 10.00 EPS 18.55 37.35 49.01 59.20 Quarterly Profit & Loss Statement for the period of 31 MARCH, 2013 to 31 DEC, 2013E Value(Rs. mn) 31-Mar-13 30-June-13 30-Sep-13 31-Dec-13E Description 3m 3m 3m 3m Net sales 2203.50 2186.40 2479.50 2613.39 Other income 0.00 0.00 0.00 0.00 Total Income 2203.50 2186.40 2479.50 2613.39 Expenditure -1851.30-1877.10-2127.50-2226.61 Operating profit 352.20 309.30 352.00 386.78 Interest -75.60-72.10-78.00-82.21 Gross profit 276.60 237.20 274.00 304.57 Depreciation -67.20-66.90-68.40-70.73 Exceptional Items -4.36 0.00 0.00 0.00 Profit Before Tax 205.04 170.30 205.60 233.84 Tax -67.00-52.00-77.20-86.52 Profit After Tax 138.04 118.30 128.40 147.32 Extraordinary Items 0.00 0.00 9.20 0.00 Net Profit 138.04 118.30 137.60 147.32 Equity capital 121.10 121.10 121.10 121.10 Face value 10.00 10.00 10.00 10.00 EPS 11.40 9.77 11.36 12.17
Ratio Analysis Particulars FY12 FY13 FY14E FY15E EPS (Rs.) 18.55 37.35 49.01 59.20 EBITDA Margin (%) 11.89% 14.57% 15.00% 15.30% PBT Margin (%) 4.84% 7.98% 8.90% 9.56% PAT Margin (%) 3.38% 5.48% 6.02% 6.48% P/E Ratio (x) 11.54 5.73 4.37 3.61 ROE (%) 12.73% 21.79% 21.89% 21.17% ROCE (%) 23.01% 29.07% 28.01% 26.93% Debt Equity Ratio 1.54 1.42 1.31 1.17 EV/EBITDA (x) 6.66 4.59 4.17 3.85 Book Value (Rs.) 145.73 171.44 220.45 279.65 P/BV 1.47 1.25 0.97 0.77 Charts
OUTLOOK AND CONCLUSION At the current market price of Rs. 214.00, the stock P/E ratio is at 4.37 x FY14E and 3.61 x FY15E respectively. Earning per share (EPS) of the company for the earnings for FY14E and FY15E is seen at Rs.49.01 and Rs.59.20 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 18% and 47% over 2012 to 2015E respectively. On the basis of EV/EBITDA, the stock trades at 4.17 x for FY14E and 3.85 x for FY15E. Price to Book Value of the stock is expected to be at 0.97 x and 0.77 x respectively for FY14E and FY15E. We expect that the company surplus scenario is likely to continue for the next three years, will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs.240.00 for Medium to Long term investment. INDUSTRY OVERVIEW India s pharmaceutical sector will touch US$ 45 billion by 2020, according to a major study by global management and consulting firm, McKinsey & Company. The reasons for this optimism are well founded. In the period 2002 2012, the country s healthcare sector grew three times in size, touching US$ 70 billion from US$ 23 billion. India's pharmaceutical market experienced a similar boom, reaching US$ 18 billion in 2012 from US$6 billion in 2005. The report further states that the Indian pharmaceutical market will be the sixth largest in the world by 2020. The rise of pharmaceutical outsourcing and investments by multinational companies (MNCs), allied with the country's growing economy, committed health insurance segment and improved healthcare facilities, is expected to drive the market s growth. India is today one of the top emerging markets in the global pharmaceutical scene. The sector is highly knowledge based and its steady growth is positively affecting the Indian economy. The organised nature of the Indian pharmaceutical industry is attracting several companies that are finding it viable to increase their operations in the country. Market Dynamics The domestic pharmaceutical market has reported total sales of Rs 6,883 crore (US$ 1.12 billion) in the month of July 2013, a growth of 13.5 per cent, according to IMS Health. The major factors responsible for this growth are increasing sales of generic medicines, continued growth in chronic therapies and greater penetration in rural markets.
India currently exports drug intermediates, Active Pharmaceutical Ingredients (APIs), Finished Dosage Formulations (FDFs), Bio-Pharmaceuticals, and Clinical Services across the globe. The exports of pharmaceuticals from India grew to US$ 14.6 billion in 2012 13 from US$ 6.23 billion in 2006 07, registering a compound annual growth rate (CAGR) of around 15.2 per cent. The Ministry of Commerce has set a target for Indian pharma sector exports of US$ 25 billion by 2014 at an annual growth rate of 25 per cent. Among the top pharma companies, Abbott with total sales of Rs 452 crore (US$ 73.67 million), Cipla with Rs 322 crore (US$ 52.48 million), Sun Pharma with Rs 313 crore (US$ 51.02 million), and Zydus Cadila with Rs 268 crore (US$ 43.69 million) were the fastest growing companies in the month of September 2013. In terms of growth, Sun Pharma (17.8 per cent) is ahead of peers such as Cadila (1.8 per cent), Cipla (0.8 per cent) and McLeod (0.7 per cent). Investment Opportunities The cumulative drugs and pharmaceuticals sector has attracted foreign direct investments (FDI) worth US$ 11,391.03 million in the period April 2000 September 2013, according to data published by Department of Industrial Policy and Promotion (DIPP). India, with almost 200 United States Food & Drug Administration (USFDA)-approved drug manufacturing facilities, is the biggest foreign supplier of medicines to the United States (US). Exports to the US rose nearly 32 per cent last year to US$ 4.23 billion. India accounts for nearly 40 per cent of generic drugs and over-the-counter products and 10 per cent of finished dosages used in the US. Generic drugs have a dominant position in the rapidly expanding Indian pharmaceutical industry. India's exports of generic drugs have been growing at a rate of 24 per cent over the past four years. In 2012, the country was recognised by the Supply Annual Report of UNICEF the United Nations children s fund as the global leader in the supply of generic drugs. The Department of Pharmaceuticals has projected an investment of Rs 3,000 crore (US$ 489.19 million) to set up 10 more National Institute of Pharmaceutical Education and Research (NIPER) over the next few years. Some of the major investments in the Indian pharmaceutical sector include the following: GlaxoSmithKline Plc plans to invest Rs 864 crore (US$ 140.86 million) to set up a new factory in India. The plant, which is expected to be operational by 2017, will include a warehouse, site infrastructure and utilities to support the manufacturing and packing of the medicines. Cadila Pharmaceuticals Ltd (CPL) plans to invest Rs 100 crore (US$ 16.30 million) on expansion, upgradation and modernisation of its manufacturing unit at Samba in Jammu district.
HLL Biotech Limited (HBL), a subsidiary of HLL Lifecare Ltd, has entered into a long-term supply and technology license agreement with the Institute of Immunology, Zagreb (IMZ), Croatia, for the manufacture of measles vaccine in India. Under the partnership agreement, IMZ will transfer the technology to manufacture bulk measles vaccine to HBL. Ranbaxy Laboratories Ltd has received an approval from the Central Drugs Standard Control Organisation (CDSCO) to manufacture and market a new drug for the treatment of malaria in adults. Cipla has acquired a majority stake in Uganda-based Quality Chemical Industries Ltd (QCIL), with the acquisition of an additional 14.5 per cent stake for US$ 15 million through its subsidiary, Meditab Holdings Ltd (MHL). Dr Reddy's Laboratories Ltd has received approval from the USFDA for its Azacitidine injection. The drug is used for treatment of some types of cancer and disorders that affect the bone marrow. Government Initiatives The Government of India has allowed 100 per cent FDI through automatic approval route in the new pharma projects but the foreign investment in the existing pharma companies needs approval from Foreign Investment Promotion Board (FIPB). The Cabinet has approved Pharmaceuticals Purchase Policy (PPP) for 103 medicines to ensure optimum utilisation of the installed capacity of the pharma central public sector enterprises (CPSEs) and availability of quality medicines at low prices to the masses, besides ensuring drug security of the nation. In a move to simplify the barcode procedures for pharmaceutical companies and to ensure quality, the Government of India has decided to treat mono cartons containing medicines as primary level packaging, said the Directorate General of Foreign Trade (DGFT). The Government of India has made tax breaks available to the pharma sector and a weighted tax deduction of 150 per cent for any R&D expenditure incurred. It has also introduced 19 dedicated special economic zones (SEZ) to help stimulate pharma sector investment across the country. The government has signed a bilateral agreement with the Republic of Hungary for promotion and development of traditional systems of medicine. Road Ahead The Indian pharma industry is on a good growth path and is likely to be in the top 10 global markets in value terms by 2020, according to the PwC-CII report titled India Pharma Inc: Gearing up for the next level of growth. High burden of disease, good economic growth leading to higher disposable incomes, improvements in healthcare infrastructure and improved healthcare financing are driving growth in the domestic market, the report highlighted.
The small and medium enterprises (SMEs) are expected to play a significant role in the growth story of the country's pharma sector as they contribute 35 40 per cent to the industry in terms of production with a turnover of about Rs 35,000 crore (US$ 5.70 billion). With the support of Pharmexcil and the Government in the form of Brand India Pharma project iphex, the sector would continue to grow and meet the healthcare requirements of the developing world. The country will also see the largest number of merger and acquisitions (M&A) in the pharmaceutical and healthcare sector, according to consulting firm Grant Thornton. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.
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