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Research efforts put-in by the company in last several years has led to it filing more than 70 patents out of which it has already got 10 in its kitty with 2 being in world’s largest medical disposables market viz., USA. The company is expanding its product portfolio and is entering new markets as well.
“Street Smart" - Mid Cap Multibagger for Apr 2010 HBJ Capital Services Pvt Ltd Web: www.hbjcapital.com Mail: Info@hbjcapital.com Call: +91 98867 36791
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1st Phase : Buy at the current price range Rs 108 – 112 [50% of investment] 2nd Phase : Add when the price falls down to Rs 80 – 92 [50% of investment] Average Buy Price Recommended = Rs. 100 [(110 + 90) / 2]
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Table of Contents
From the desk of CEO, HBJ Capital. Poly Medicure Ltd – Page#7 Key Positives – Page#11 Investment Rationale – Page#17 Financial Statements – Page#26 Management Team – Page#33 Best price to buy – Page#36 Challenges/Risks involved – Page#38 Know more about Your - HBJ Capital.
From the desk of CEO, HBJ Capital
The world is going to focus on making healthcare affordable for all. It is being seen that many of the international players are setting up their R & D facilities, manufacturing plants in India due to its significant cost advantage. Many of the small Indian companies have already started exporting medical equipments to the rest of the world!!
There is no denying that today the whole world is increasingly focusing on affordable healthcare. Due to focus on reducing costs plastics have come to the fore front of medical innovation. In a country like India where the focus on improving the healthcare system is increasing by the day, the medical disposables industry will have a major role to play to help achieve the final goal. With a population of 1.15 billion, India will need to at least 2 million beds in the next 10 years in order to attain a modest target of 2 per 1000 of population. With a total healthcare value of Rs 1800 billion, the potential for medical disposables equipment is, indeed large. The Indian domestic medicare devices industry is expected to grow from Rs 60 billion to Rs 76.5 billion in four years. The overall market is estimated at Rs 150 billion. Apart from the electronic instruments and major equipment, substantial progress has been registered in the area of a number of medical accessories and consumables. These include disposables - syringes, blood bags, cannulae, IV fluid sets, gloves. In most of these items, while the demand is increasing fast, India is becoming increasingly selfsufficient. Fairly large quantities are also being exported.
Things are already improving for Indian Medicare equipment manufacturers. India is being looked upon by the whole world to provide low cost solutions with regards to medical accessories, consumables & disposables. Many Indian companies have been able to sell their products across the globe due to price advantage. With the new US healthcare bill focusing on reducing healthcare costs, these small Indian companies could have a good time in the coming few years. And we believe that its just time for our Street Smart company for this month to make use of the wonderful opportunity. We are happy to select Poly Medicure Ltd as the Street Smart for the month of Apr 2010. Poly Medicure Ltd. is a medical disposables manufacturing company. The company is currently available at a market cap of 122 Crore and at a valuation of 9.8 times TTM earnings. We are expecting an earnings growth of around 40% CAGR in the next 3 years for the company. At such growth levels, the company should be able to post earnings of more than 40 Crore by FY 13. Considering a moderate valuation of 13 on TTM earnings would give a market cap of around 520 crore and that’s a 4.4 bagger from the current levels. Happy Investing! Regards Kumar Harendra, CEO, HBJ Capital Services Pvt Ltd, www.hbjcapital.com #912, 1st “F” Main Road, Girinagar 2nd Phase, BSK 3rd Stage, Bangalore 85 Call : 098867 36791 or Mail : Info@hbjcapital.com
Poly Medicure Ltd – Snapshot (Apr 28th 2010)
CMP – Rs. 111.65 (The share price of the company has
rebounded smartly since its lows last year and is closer to its life time highs. This is an indicator of the strong business fundamentals of the company and the new found opportunities for the company).
Promoter’s holding – 47.81% (The promoters have
maintained their holdings in the company for the past several years. Also, we believe that there could be substantial amount of indirect holdings in the company.)
Pledged shares – 0% Total # of shares – 1,09,06,250 shares Liquidity – Low to Medium Face Value – Rs. 10 Authorized Capital – Rs.9 crore Issued Capital – Rs. 5.5 crore Website: http://www.polymedicure.com
MCap – 122.95 crore (We are expecting an earnings
growth of around 40% CAGR in the next 3 years for the company. At such growth levels, the company should be able to post earnings of more than 40 Crore by FY 13 and assuming a valuations of 13 gives a market cap of more than 500 crore for the company)
PE – 9.8 (We find that the current valuations are impressive
considering that it on TTM earnings.)
EPS – Rs. 11.5 (based on the TTM basis) 52 Week High / Low – 125 / 36.75 (The management
recently came out with a 1:1 bonus issue for the company. And the stock made its recent highs close to the bonus issue.)
Poly Medicure Ltd
Poly Medicure Ltd is a manufacturing company producing medical disposables for the healthcare industry. Founded in 1995 by a team of technocrats dedicated to the idea of providing the benefits of modern healthcare to the mankind at affordable price, PML today has grown into one of the most dynamically versatile manufacturers of disposable healthcare products in the region with over 60 different products. The company uses modern manufacturing techniques to provide the best quality products. It exports its products to 50 countries currently with Europe being the major market at present. Research efforts put-in by the company in last several years has led to it filing more than 70 patents out of which it has already got 10 in its kitty with 2 being in world’s largest medical disposables market viz., USA.
Infusion Therapy - In medicine, infusion therapy deals with all aspects of fluid and medication infusion, usually via the intravenous route. The simplest form of intravenous access is by passing a hollow needle through the skin directly into the vein. This needle can be connected directly to a syringe (used either to withdraw blood or deliver its contents into the bloodstream) or may be connected to a length of tubing and thence whichever collection or infusion system is desired. Manufactured from tested bio-compatible materials offering longer indwelling time. PML manufactures various different types of equipments for infusion therapy. Central Venous catheter - In medicine, a central venous catheter ("central line", "CVC", "central venous line" or "central venous access catheter") is a catheter placed into a large vein in the neck (internal jugular vein), chest (subclavian vein) or groin (femoral vein). It is used to administer medication or fluids, obtain blood tests (specifically the "mixed venous oxygen saturation"), and directly obtain cardiovascular measurements such as the central venous pressure. Anesthesia - PML manufactures different types of catheters for direct administration of oxygen into the patients body.
Urology - PML manufactures various different kinds of products for collection of urine & urine samples. Gastroenterology - PML manufactures various different kinds of products for treatment of gastro intestinal problems. Various kinds of products are manufactured for introduction of nutrition & aspiration of intestinal secretion. Blood management - PML manufactures various products for blood transfusion, blood sample collection etc. Surgery & Wound drainage - Wound drainage system suitable for drainage under negative pressure post operatively with the options to operate one or two catheters simultaneously. Dialysis - PML manufactures various products which are required for patients undergoing dialysis. Others - PML manufactures various other safety devices used for various treatments.
Modern Manufacturing facilities
POLYMED manufactures its products using state of the art technology in ultra modern facilities covering over 300,000 square feet of manufacturing floor space with about 50,000 square feet of clean rooms of class 100,000 to class 1,000. A tool room with modern facilities & CNC machines supports the manufacturing processes. A high degree of automation and an effective process control helps in delivering consistent product quality. Polymed has state-of-the-art manufacturing plants in Haridwar, Jaipur & Faridabad in India and one in China and one joint venture in Egypt.
Highly trained personnel and a strong R and D
One of PML’s core strength has been its well trained and technically competent personnel. A highly qualified, experienced management provides guidance and support to the team of over 2000 people employed in different activities. To keep pace with the ever changing requirements of the market, POLYMED has a fully staffed and highly equipped R & D section to design and develop new and innovative products. The R and D department of the company is recognized by the Ministry of Science and Technology, GOI. The company has been constantly innovative and on an average has been coming out with 10 new products ever year for the last 3 years. In the last 3 years alone, the research division of POLYMED has filed for more than 70 patents. And in 2009, the company has received approvals from the US FDA for several of its new range of products including IV Catheter and Syringes.
The company derives around 75% of the revenues from exports and the remaining comes from the domestic markets. While the company has been concentrating on overseas markets due to better margins, the company has started tapping the huge domestic opportunity as well. There is enough headroom for growth in the domestic markets. In the Overseas markets, Europe is the biggest market for the company and it contributes approximately 35% of total revenues. The company also derives substantial amount of revenues from Middle East and Africa as well. In all, the company currently exports its products to more than 80 countries. While this being the current scenario, the company’s recent entry into US, the largest healthcare market in the world augers well for the growth ahead and the geographic diversification of revenues.
The company’s Quality system contains very exhaustive series of physical, chemical biological and microbiological tests and inspection at various stage of the manufacturing cycle. The company has adapted to the surveillance of raw materials and its suppliers, intensive process control of all manufactured components and sub assemblies to the final inspection and testing of the finished products. The company has been successful in implementing a well documented Quality Management system which has been accredited to SGS Yarsley International Certification services along with ISO certification and CE mark from DNV, Norway which makes the entire product range compliant with International Quality standards. Some of the company’s products are US FDA 510K approves.
India’s Low Cost Labor Advantage
India is becoming a hot destination for the offshore manufacturing outsourcing. Number of foreign companies looking to establish their own manufacturing facilities in India are increasing rapidly. Labor costs are a large part of the total costs of a company’s products . Since they are such a major part of what makes up the selling price, these costs must absolutely be kept down in order for a company to survive. India has a huge advantage with regards to the quality of skilled & unskilled manpower that is available in the country.
India’s Healthcare Expenditure as % of GDP
India currently has a very low spend on healthcare as a % of the total GDP As on 2009 healthcare contribution . was around 5.5% of the total GDP. This number is very small as compared to the 16% spent by USA & 7-9% spent by European countries. According to estimates, this number is going to increase significantly over the coming years. It is crystal clear that with the fast commercialization process of the sector and up gradation of medical facilities, the potential is sky high.
Strong growth in demand
With a population of 1.15 billion, India will need at least 2 million beds in the next 10 years in order to attain a modest target of 2 per 1000 of population. With a total healthcare value of Rs 1800 billion, the potential for medical disposables equipment is, indeed large. The Indian domestic medicare devices industry is expected to grow from Rs 60 billion to Rs 76.5 billion in four years. The overall market is estimated at Rs 150 billion. With increasing demand for quality healthcare, corporate hospitals have aggressive expansion plans to scale up their activities and have an all India presence. They are creating great opportunities for medical device companies. The hospital sector is expected to grow at 15% p.a. for the next 5 years and will create huge opportunities for medical device companies. Polymed has been active in scouting for partnerships with major hospital chains. The company has already tie ups with few hospital chains through which they provide the medical equipments for all the hospitals. Other than private hospital chains, the company has also plans to target private nursing homes.
Focus on Domestic markets
During FY 2009 PML got 25% of its revenues from domestic sales. And, two years back the domestic markets were contributing less than 15% to the total revenues. Clearly, the company has making its moves to tap the huge domestic opportunities. During the last 1 year PML has started to market its products aggressively in the Indian markets. PML has opened new sales offices in Hyderabad, Chennai & Kolkatta. PML is planning to increase its domestic sales force by 25% during the year. PML is also focusing on providing medical disposable equipments for the purpose of various state run healthcare programs. PML expects to tie up with government of Maharashtra, Gujarat & Rajasthan for the same. Within a couple of years, management expects domestic market to contribute 50 % of its sales up from 25 % it contributes at present.
US Healthcare Bill & India Advantage
The reform bill which has recently been passed into law in the US has two key features. It increases health coverage and aims at the reduction in healthcare costs. The bill increases the coverage to an additional 32 million uninsured Americans who make up about 10 per cent of the total US population. The bill prohibits insurance companies from excluding people with preexisting medical conditions and dropping policy holders on account of coverage limits. Secondly, the bill which is expected to cost US taxpayers $940 billion over the next decade is expected to reduce the US fiscal deficit by $143 billion. With the recently announced bill healthcare companies in USA are under tremendous amount of pressure to cut down their costs. It is being estimated that by 2012 India would be getting 70% of the R&D work to be carried out for various healthcare companies. The trend of US based companies setting up their production base in India is on a rise. Indian companies manufacturing quality & low cost healthcare products are at a significant advantage.
PML is planning to expand its manufacturing capacity with an investment of Rs 40 crore in the next two years in an effort to grab the market and contract manufacturing opportunities in the US and Europe. PML currently has a capacity to manufacture 260 million pieces of medical devices per annum, is planning to expand the current facility and will set up a new plant exclusively for exports to European Union markets. With the expansion, the capacity will reach production of 400 million pieces of medical devices per annum. The expansion of current facility, is in tune with the fast growing market demand in the country. Expansion will be completed within 2010 even as the export oriented unit will be functional in 2011. Around 50 per cent of the investment will be infused from the internal accruals whereas the rest will be based on loans.
JV’s & Acquisition Plans
In a recent interview the company management said that PML was mulling on acquiring a medical devices company with research and development focus in US, by spending around USD 20 to 30 million. Poly Medicure Ltd (PML) is in talks with a European company to develop, design and manufacture safety medical devices in the country. Any further developments on this front could significantly enhance the profitability for the company.
B Braun had recently initiated a series of cases against Poly Medicure in the area of safety IV catheters. The Regional Court of Düsseldorf, Germany, which handles a significant part of patent infringement cases in Europe, has removed preliminary injunction which was issued in favor of B Braun Melsungen AG in November 2009. With the removal of the preliminary injunction, Poly Medicure and its distributors can now sell the product in Germany. While, the charges of infringement on PML was already cleared in India, the same happening in the home turf of B Braun is comforting. PML had launched 2 niche products in Indian market viz., blood collection tubes & insulin syringes in May 2009. Both the products command a healthy domestic market share. The company expects to significantly increase revenues from these 2 products. PML has got 5 USFDA approved products. 3 out of the 5 products i.e IV Catheter, Safety Scalp Vein Set and Safety Infusion Set, can easily contribute revenues to the tune of Rs. 50 crs for the company. The IV Catheter product manufactured by the company has a global market of more than US$1 Bn. The IV catheter product manufactured by PML is much superior in quality & has been priced lower than its global competitors.
P and L statement – Annual (Standalone)
P and L statement – Annual (Consolidated)
The revenues of the company have been constantly increasing over the year. The increase in turnover is indicative of the fact that the products of the company are doing well. As the company derives 75% of its revenues from exports it can be said that the products of the company meet global standards. Also, during 2009 the company faced a loss of close to Rs. 10 crs on account of rupee depreciation. The profitability margins would have been much better if this loss would have been reduced. Going forward we expect the margins of the company to improve significantly due to the launch of US operations & increasing focus on domestic markets. We expect the company to post a Net Profit margin of close to 12 to 13% going ahead. We expect the company to post revenues of around 130 Crore for the FY 2010. We also expect the company to grow its revenues at a CAGR of around 3540% for the next 3 years leading to revenues of around 350 Crore by FY 13. We also expect the earnings to grow at a similar pace and the company should be able to post net earnings of more than 40 Crore by FY 13.
P and L statement - Quarterly
It can be seen that during the recent quarters the PAT margins have improved significantly. We expect the company to post modest sales growth on a YoY basis. Going forward we expect the company to post robust sales growth once the capex has been completed by the end of 2010. We also expect the US business to make significant contribution to revenues & improve margins during the next few years. We expect the company to make an EPS of close to Rs.14/ for the year. This EPS has been calculated on a 1:1 bonus which the company has issued recently.
Balance Sheet - Standalone
Balance Sheet - Consolidated
The company has not diluted much equity in the last 5 years to manage its growth. The Debt to equity level for the company has been reasonable in the last few years. Going forward the company plans to raise some debt for its future expansion projects. Total Gross Block of assets of the company has seen a strong growth over the years. Over the years the company has been able to achieve its scheduled capex plans on time without any significant delays. We expect the same to continue going ahead. The current assets of the company have increased reasonably with the increase in sales over the years. Current ratio for the company is very comfortable at 2.1. This indicates healthy liquidity for the company.
Debt to Equity ratio of the company is comfortable. It provides room for increasing leverage to achieve growth in the coming years. Fixed assets ratio has decreased due to lower capacity utilization. We expect this ratio to increase going forward. Despite the drop in profits for FY 2009 the return ratios look healthy for PML. Debtors days & Inventory turnover days are pretty healthy for PML. Interest coverage ratio for the company has declined over the years. We believe that going forward the ratio should be quite comfortable as the company had suffered from huge forex losses during the year. Profitability margins for the company should improve going forward due to better utilization of fixed assets & due to contributions coming in from the high margin US markets.
Himanshu Baid - Himanshu Baid is currently Promoter and Managing Director in Poly Medicure Limited from 20th September 1995 till date for last 12 years. Mr Baid, after completing his BE, joined Philips in Germany where he gained vital experience in international trade. His stint in Philips helped him understand the psyche of international marketers. He also worked as Chief Executive in Polycon International Limited making plastic moulded products and looked after the day-to-day techno-commercial affairs of that Company from June 1990 to October 1994. Himanshu worked as a Director in Polycure Martech Limited & Jai Polypan Private Limited from November 1994 to August 1995. Rishi Baid - Rishi Baid, Executive Director of the Company, age 37 years, is B.S.M.E and M.S.M.E. (Mechanical) from West Virginia University, U.S.A. Prior to joining Poly Medicure, he served Miles Pharma Inc. USA.
Share Holdings pattern
The promoters hold 47.55% stake in the company. No share pledging activity has been done by the promoter. Promoter holding is very comfortable. The promoters have been maintaining their holdings for the past several years. We believe that there can be substantial amount of indirect holding in the company. The company had recently announced a 1:1 bonus issue after which the total number of outstanding shares have gone up for the company. Institutions does not have any holdings currently. We believe that as the company grows its revenues and the market cap improves, institutions will be taking stakes in the company.
Best Price to Buy
Post the split, the stock has showed strong signs of strength and has been quick to rebound. We believe that there could be a consolidation at the current levels for a while. Also, the stock has a very strong support at around 90 levels and a range of 88 to 92 can be a very good second entry point in the counter. Hence, we advise a 2 phase buying strategy – one at the current levels and the other between 88 and 92 levels.
Challenges / Risks involved
Challenges / Risks involved
Following are some of the key risks that could derail our estimates and expectations – Raw material prices – Plastic granules is the major raw material required by the company. Other major raw materials required by the company are also plastic based products. As we know that plastic prices are based on crude oil prices, any increase in crude prices can adversely affect the profitability of the company. Rupee Appreciation – Currently, the company derives 75% of its revenues by way of exports. Any appreciation in rupee can have a negative impact on the earnings of the company. However, the fact that the company imports 70% of its raw material provides a natural hedge to the company to a huge extent. Also, the share of domestic revenues has been on a constant rise. Small Players – The company operates in business which has a lot of small and unorganized players that provide a competitive threat to the company. However, the industry is witnessing a increase in market share of organized players and this augers well for a company like Poly Medicure.
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