INVESTMENT IDEA 03 Dec 2016

PCG RESEARCH
FDC Ltd.
Industry CMP Recommendation Buying Range Target Time Horizon
BUY at CMP and add on
Pharmaceuticals Rs. 218 Rs. 192 - 218 Rs. 255 - 290 3-4 Quarters
Declines

HDFC Scrip Code FDCLTD Company Background
BSE Code 531599
FDC Ltd. is a domestic focused pharmaceuticals company with a 1.2% market share of the Indian
NSE Code FDC Pharmaceuticals Market (IPM). The Company is engaged in the manufacturing of Formulations (75% of
Bloomberg FDCLT FY16 revenues), APIs (6%) and Oral Rehydration Salts (ORS) (19%). Its therapeutic areas of focus include
Anti-Infectives, Ophthalmological, Vitamins / Minerals / Dietary supplements, Cardiac, Anti-Diabetes and
CMP as on 02 Dec-16 218 Dermatology. It has a range of functional foods and beverages. Its active pharmaceuticals ingredients
Equity Capital (Rs Cr) 17.9 (APIs) produced cover a range of therapeutic categories, such as Albuterol Sulfate, Bromhexine
Hydrochloride, Cinnarizine, Dihydrochloride, Flurbiprofen Sodium, Miconazole Nitrate and Timolol Maleate.
Face Value (Rs) 1 The major brands include Zifi, Electral, Enerzal, Vitcofol, Pyrimon, Zocon, Zipod, Cotaryl and Mycoderm.
FDC is a leading player in Oral Rehydration Salt (ORS) segment, with its well-known brand Electral and
Equity O/S (Cr) 17.9
Enerzal. It has multi-location manufacturing facilities for APIs, as well as finished dosage formulations
Market Cap (Rs cr) 3870 (FDFs).
Book Value (Rs) 59
Company has plants located at various parts of India such as at Roha Dist. Raigarh, Waluj and Sinnar in
Avg. 52 Week Maharashtra, Verna in Goa and Baddi in Himachal Pradesh. Company had 5,277 permanent employees as
95710
Volumes on March-2016 out of which 3,785 employees are engaged in the marketing and distribution activities; 850
52 Week High 244 MRs were added in Ophthalmology and Cardiac division during FY16. FDC also exports formulations to the
country like Denmark, UK, USA, Africa and Australia. Company derived exports revenues of Rs 130cr in
52 Week Low 165 FY16 (13% of Revenues); with a pick-up in ORS sales to Africa and Opthalmics solutions sales to US and
UK, where it has received regulatory clearances for its plants. We expect exports to pick up with ~20%
growth for the next 2-3 years.
Shareholding Pattern (%)
Promoters 68.9 We believe company would post faster revenue growth led by Exports formulations as company launches its
products in US markets and also traction from EU markets. Moreover, Company has strong hold on some of
Institutions 14.3 its products in ORS, Anti Infectives and Cardiac and those products would continue to do well in domestic
market. FDC has posted 9.2% revenue and 5.3% PAT cagr over FY13-16. We forecast 11% revenue cagr
Non Institutions 16.8
over FY16-19E led by strong traction from domestic business and exports revenue to post 18% cagr, given
the low base effect and US business to accelerate going forward. We expect 590bps margin surge over
FY16-19E driven by operating leverage tailwinds and focus on high margin products. Company has posted
EBITDA margin of 26.9% in H1 FY17. Accordingly, we have envisaged 25% PAT cagr over the same period
Kushal Rughani and expect company to post Rs17 EPS for FY19E. We recommend investors to BUY FDC at CMP of Rs218
kushal.rughani@hdfcsec.com and add on dips to Rs192 for sequential targets of Rs255 and Rs290 (based upon 17x FY19E earnings) over
the next 3-4 quarters.

Private Client Group - PCG RESEARCH Page |1

The company’s antifungal brand Zocon had revenues of Rs 37cr and grew at 29% and is one of the fastest growing antifungal brands in India. We expect net profit to improve on price increases of non-NLEM products. The company’s nine major brands are listed among top 1.7% increase in overall revenues during H1 FY17. volume growth and price increase up to 10% for non-NLEM (National List of Essential Medicines) products in April’16. New Launches. These four brands collectively contributed ~50% to the revenues and are likely to be future growth drivers.PCG RESEARCH Page |2 . Material costs fell by 500bps YoY to 31. +21% yoy for H1 FY17. Domestic revenues increased 6% yoy to change in products mix and decline in raw material costs.  FDC’s multivitamin brand Vitcofol had revenues of Rs 45cr and grew at 15. H1 FY17: Revenues up 5. The company’s nine major brands are in the list of top 1. Enerzal and Zifi CV grew faster than the market growth of 14%. Key Highlights  The company’s major brand Zifi and its line extensions had posted revenues of Rs 270cr in FY16.000 brands and contribute 50% to domestic revenues. Net profit rose 39% YoY to Rs67cr from Rs 48cr led by strong margin improvement and lower tax rate. convenient to carry and have higher margins. Private Client Group .3%. We expect these tetra packs to drive future growth as these are ready to drink.7% YoY.7% due to change in product mix. volume growth and line extensions. Company has posted EBITDA margin of 26. with higher revenues from flagship brands and fall in prices of crude related chemicals. The company has revised higher the prices of Electral and Enerzal tetra packs in the domestic market. We expect margin improvement led by new product launches. EBIDTA margin surged 570bps to 28.8% in Q2. Other expenses declined by 130bps to 24.000 brands and contributed 51% to the revenues. Margin expanded 380bps FDC posted 5.3%. PCG RESEARCH Investment Rationale Q2 FY17 Update FDC’s Q2 FY17 revenues grew 10% YoY to Rs 290cr from Rs 265cr driven by Zifi.5% from 22.7% from 36. Electral and Enerzal.0% from 25.9% in H1 FY17. Electral. FDC’s four major products Zifi. contributed 32% of domestic revenues. company had made provision of Rs6cr. PAT came in at Rs 115cr. mainly due to the decline in raw material cost. During Q1.

5% in FY15. 2016. Other Products are under development / ready for launch. company entered into the ophthalmic therapeutic segment.  Electral generated revenues of Rs140cr and grew 12% yoy despite being under price control. FDC entered into oral rehydration salts (ORS) with Electral. Liquids.  Company has launched “Enerzal” in Pet Bottle (Orange and Apple Flavour). Latanoprost 0. In 1963. The brand is superior to competing brands contain caffeine. 2. In 1972.2% of revenues in FY16 vs. Philippines. FDC has generated sales of Rs 6cr from APIs and Rs7. Myanmar from Waluj site. Hong Kong.3 lakh packs per day.5cr from finished formulations. In 1949 company set up its first manufacturing unit with the objective of manufacturing indigenous formulations and absorbent cotton wool. We expect company to spend more on R&D (expect ~4% of revenues in the coming years) Company History and other key details FDC had started its business in 1936 as an importer of formulations.PCG RESEARCH Page |3 . Ethiopia. medical equipment and specialized infant foods. The company promotes the product as sports drink at various sports events. ORS) were registered in Sri Lanka. The product was introduced as a substitute to IV fluids and it has become a household name in the last 25 years. whereas Enerzal is caffeine free and hence not habit forming. PCG RESEARCH  FDC’s flagship brand Enerzal had posted revenues of Rs35cr in FY16. 20 Other product approvals were received in Rest of the World markets of which 17 products (Ophthalmics. One tablet formulation was registered in Botswana from Goa III and one ORS product was registered in Tanzania from Sinnar and Kit pack for Congo from Goa I.005% Ophthalmic Solution ANDA got US FDA approval.  Company has ramped up its R&D expenditure to 3. Peru. Company has one of the best product portfolios in the ophthalmic segment catering to almost all-possible eye ailments. Private Client Group . The US Business for API's and formulations is expected to contribute significantly to the growth of FDC's International business going forward. FDC derived about 30% of its domestic revenues from price controlled products. FDC started this project in a small setup at Jogeshwari with an initial capacity of 4000 packs per day and today it has separate manufacturing facilities at Nashik and Waluj with total capacity of 2.  During the year March 31. Zimbabwe. FDC markets through chemists directly to gymnasiums and health institutes. in which FDC commands ~20% market share at present.  In April 2016.

e. FDC started manufacturing bulk drugs at Roha. Company continues to focus on increasing export of ophthalmic dosage formulation to high margin markets of EU. mainly the bulk drugs. since IPO). This plant has UK authority approval for sterile dosage forms. which were required for captive consumption and also had export potential. FDC established another manufacturing unit for solid dosage form at Goa with the objective of manufacturing selected products going off patent for the international market. Timolol Maleate and Salbutamol sulphate. PCG RESEARCH In 1978. Company started with manufacture of Diazepam. In the developed nations of Europe and US. thus FDC would be benefited. Today Nashik plant manufactures ORS formulations. FDC has launched few innovative products in this segment and several are in the pipeline. FDC has majority of the stake. and their major brands are likely to drive the future growth of the industry.3% to US$55 billion by 2020. In 1989. The 24 listed pharma companies generated revenues of Rs 494. FDC came out with maiden public issue at price of Rs100 per share to set up the formulation plant at Nashik. Metronidizole.5%. In 1983 Company started foods division. Domestic Pharmaceuticals Outlook The domestic pharma market was valued at Rs 878. The Indian pharmaceuticals market increased at a CAGR of 17.4% during 2005-16 with the market increasing from US$6 billion in 2005 to US$36. FDC has joint venture with group of professionals in UK to export Ophthalmic range of formulations. nutraceuticals have become a major market. FDC stock price has given fantastic returns from Rs10 to Rs440 in the span of 20 years (i. In 1998. This slow growth is attributed to some major drugs coming under price control during the year. Tinidizole. In 1996. Later on. Company setup a state of art manufacturing facility at Waluj. In this JV. Hydroxy ethyl and Theophylline. Private Client Group . it shifted focus to high value low volume drugs such as Flurbiprofen. Trimethoprim. By 2020.7 billion in 2016 and is expected to post CAGR of 15. India is likely to be among the top three pharmaceutical markets by incremental growth and sixth largest market globally in absolute size. Aurangabad. It is to be noted that Adjusted for Split and Bonus. same trend is expected to be in the domestic market.5% in FY16 as per IMS MAT March 16 data. In the coming years.5bn (56% of total) and grew at 12% compared to the industry growth of 13. part payment of two Form-Fill-Seal (FFS) machines besides modernization/ expansion / integration of existing manufacturing facilities and R&D centers.7bn and grew at 13.PCG RESEARCH Page |4 . Currently this division is known as nutraceuticals. The 24 listed pharma companies have lion’s share of over 56% in the domestic market.

Company caters to the country like Denmark. A combination of all three factors would lead to strong company revenues and industry growth. Export Formulations to post strong revenue growth Though Majority part of revenues is derived from domestic market.700 Sq.PCG RESEARCH Page |5 . Being the decision maker. UK. with a pick-up in ORS sales to Africa and Opthalmic solutions sales to US and UK. mtrs located at Jogeshwari (West). PCG RESEARCH We expect the key pharma brands to drive future growth of the domestic pharma industry as these have higher recall in the doctor’s community. The said audit was carried out in relation to cGMP inspection and ANDA filed by the company for product cefixime tablets (Anti Infectives). company has miniscule exposure to US markets. established brands and effective brand promotion. company has filed several ANDAs and intends to focus more on R&D thus company may surprise positively if US revenues scales up considerably. Mumbai for Rs 261cr which they were using on lease since 1949 and lease was going to expire in 2018. Company had purchased the property of ~8. Currently. USA. The domestic pharma market consists of branded generic market of patent-expired products. the doctor will prefer familiar brands and those that have demonstrated excellent therapeutic efficacy. US FDA had made two minor observations for which appropriate steps shall be taken by the company. We expect the domestic pharma market driven by fast growing lifestyle segments. We expect exports sales to pick up with ~18% growth for the next 2-3 years. FDC had acquired property at Jogeshwari. The USFDA carried out the audit of the facility in relation to cGMP (Current Good Manufacturing Practices) norms and the abbreviated new drug application (ANDA) filed by the company for Dorzolamide ophthalmic solution. where it has received regulatory clearances for its plants. Company derived exports revenues of Rs 130cr in FY16 (13% of Revenues). FDC Ltd has received the establishment inspection report (EIR) from US Food and Drug Administration (US FDA) for its manufacturing unit situated at Baddi (Himachal Pradesh) with no observations. Passed through US FDA inspection successfully The US Food and Drug Administration (US FDA) has completed the inspection of the company’s manufacturing unit situated at Waluj in July 2016. FDC also derives revenues from exports formulations. Private Client Group . This was the main reason for the surge in company’s fixed assets and decline in investments during FY16. This approval confirms the closure of inspection conducted in February 2016. Africa and Australia. Erstwhile it was on lease In Aug 2015.

We recommend investors to BUY FDC at CMP of Rs218 and add on dips to Rs192 for sequential targets of Rs255 and Rs290 (based upon 17x FY19E earnings) over the next 3-4 quarters. Moreover. given the low base effect and US business to accelerate going forward. higher growth trajectory from exports formulations and focus on high margin products.2% revenue and 5.PCG RESEARCH Page |6 . Major Products in Domestic Market Therapeutic Rev Cont ( Product Name Segment FY16 ) Zifi and its Ext. Slower than expected exports formulations revenue may lead to disappointment in financials. we have envisaged 25% PAT cagr over the same period and expect company to post Rs17 EPS for FY19E. FDC posted 5. HDFC sec Research Private Client Group . Accordingly. the slower growth in those products may impact company negatively.9%. We forecast 11% revenue cagr over FY16- 19E led by strong traction from domestic business and exports revenue to surge 20%+.3% PAT cagr over FY13-16. company highly depends on the top 4 Brands (~50% of Domestic Revenues). Key Risks The 30% of FDC domestic products portfolio is under NLEM which might impact on margin for the company. PCG RESEARCH Expect 11% revenue and 25% PAT CAGR over FY16-19E FDC has posted 9. We expect 590bps margin surge over FY16-19E driven by operating leverage tailwinds. Anti Infectives Rs 270cr Electral ORS Rs 140cr Vitcofol Multivitamins Rs 45cr Zocon Anti Fungal Rs 37cr Amodep AT CVS - Enerzal Nutraceuticals - Source: Company.7% revenue growth for H1 FY17 however EBITDA margin surged 380bps yoy to 26.

3 8.0 15. Financial Summary (Rs cr) (Rs Cr) FY14 FY15 FY16E FY17E FY18E FY19E Sales 846 889 1006 1092 1243 1435 EBITDA 207 198 224 277 336 403 Net Profit 135 148 157 205 248 303 EPS (Rs) 7.7 12.5 13.3 14.8 11. HDFC sec Research Private Client Group .6 16.6 RoE 16.5 9.8 19. HDFC sec Research.4 24.PCG RESEARCH Page |7 . PCG RESEARCH Company Positioning in IPM (#) MAT MAT MAT Therapy Mar Mar Mar Segment 2016 2015 2014 Electrolytes 1 1 1 Opthal/Otolog 7 8 8 Energy Drink 1 2 2 Anti Infectives 12 12 11 Cardiac Care 33 32 32 Vit/Min/Nutris 36 34 35 Source: Company.6 17.8 18.9 17.9 19.8 26.7 19.0 P/E 28.9 EV/EBITDA 18.0 18.6 8.8 Source: Company.6 15.0 11.

PCG RESEARCH Page |8 . HDFC sec Research FY16 Intl Revenues Split (%) 20 Denmark UK 32 USA 5 Aus & NZ 7 Africa Malaysia 10 Others 14 12 Source: Company. PCG RESEARCH Revenues to witness 11% cagr over FY16-19E EBITDA and PAT to witness robust growth momentum 1600 450 1400 400 1200 350 1000 300 Rs Cr 800 250 600 200 400 150 200 100 0 50 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY14 FY15 FY16 FY17E FY18E FY19E Source: Company. HDFC sec Research Private Client Group . HDFC sec Research Source: Company.

0 15.0 20. PCG RESEARCH OPM to surge 590bps over FY16-19E 30.0 10.0 25.0 15.0 FY14 FY15 FY16 FY17E FY18E FY19E Source: Company.0 FY14 FY15 FY16 FY17E FY18E FY19E RoE RoCE Source: Company. HDFC sec Research Strong Return Ratios (%) 25. HDFC sec Research Private Client Group .0 % 20.0 10.0 5.PCG RESEARCH Page |9 .

0 Long term Debt 1 1 1 1 1 1 EBITDA Margin (%) 24.0 Net Block 300 420 694 716 734 788 PBT 218 203 220 282 342 414 Non Current Investments 187 217 35 83 172 222 83 56 63 79 96 116 Long Term Loans & Advances 130 8 8 10 14 19 Tax RPAT 135 148 157 205 248 303 Total Non Current Assets 617 645 737 809 920 1029 Inventories 103 123 131 132 160 177 Growth (%) -12.3 21.6 8.1 13.5 30.9 17.2 8.1 2.9 Operating Expenses 639 691 783 815 907 1032 Reserves 827 919 1032 1191 1376 1593 EBITDA 207 198 224 276 336 403 Shareholders' Funds 845 937 1050 1209 1394 1611 Growth (%) 14.8 15.2 12.8 23.8 11.0 2.5 13.9 17.9 7.9 17.0 1.2 25.6 -4.1 Net Deferred Taxes 30 23 19 19 19 19 Depreciation 25 39 34 34 37 40 Long Term Provisions & Others 1 1 1 1 1 1 EBIT 182 159 190 242 299 363 Total Source of Funds 877 962 1070 1257 1446 1680 Other Income 39 46 32 41 45 53 APPLICATION OF FUNDS Interest 3.1 2.9 17.2 6.9 17. HDFC sec Research Cash & Equivalents 22 15 18 68 86 121 Other Current Assets (incl Curr Invests) 253 303 283 341 370 441 Total Current Assets 436 502 496 614 702 840 Trade Payables 79 87 83 86 95 110 Other Current Liab & Provisions 100 101 81 80 80 79 Total Current Liabilities 179 188 164 166 175 189 Net Current Assets 256 314 331 449 527 651 Total Application of Funds 877 962 1070 1257 1446 1680 Source: Company.4 21.3 8.5 Share Capital 17. HDFC sec Research Private Client Group .4 5.4 1.3 22.5 13.0 Trade Receivables 57 61 63 74 86 101 EPS Source: Company.3 27.9 17.0 28. PCG RESEARCH Income Statement (Consolidated) Balance Sheet (Consolidated) (Rs Cr) FY14 FY15 FY16 FY17E FY18E FY19E (Rs Cr) FY14 FY15 FY16 FY17E FY18E FY19E Net Revenue 846 889 1006 1092 1243 1435 SOURCE OF FUNDS Growth (%) 9.6 21.5 22.PCG RESEARCH P a g e | 10 .7 9.5 20.

1 Non-operating & EO items -39 -46 -32 -41 -45 -53 EBIT Margin 21.2 -1.0 90.7 3.9 Share Capital Issuance 0 0 0 0 0 0 P/BV 4.3 -0.9 19. HDFC sec Research Div Payout Ratio (%) 29.2 Debt Issuance / (Repaid) -1 0 0 0 0 0 Dividend 2.6 23.7 99.3 52.6 8.8 3.0 1.6 3.7 27.8 Working Capital Change -13 -72 -19 -68 -60 -90 RoCE 21.3 18.6 Free Cash Flow Investments 58 -30 182 -48 -89 -50 PER SHARE DATA EPS 7.3 2.6 2.3 -0.0 21.2 INVESTING CASH FLOW ( b ) 80 -142 -97 -22 -89 -72 BV 47.7 Source: Company.4 Interest Expenses -3 -2 -1 -1 -2 -2 VALUATION FCFE 90 -89 -171 114 133 121 P/E 28.5 17.0 Source: Company.1 Depreciation 25 39 34 34 37 40 RoE 16.3 Capex -17 -158 -311 -15 -45 -75 Net D/E -0.3 8.2 2.0 18.5 17.0 11.5 13. HDFC sec Research Private Client Group .6 4.6 24.2 -1.0 1.6 17.9 17.8 67.2 25.6 15.8 20.4 16.3 27.9 22.4 Dividend -46 -46 -46 -57 -71 -89 EV/EBITDA 18.3 Interest Expenses 3 2 1 1 2 2 APAT Margin 16.6 4.1 22.3 14.5 22.3 1.8 11.4 10.6 FINANCING CASH FLOW ( c ) -50 -48 -47 -58 -73 -91 4.0 28.1 2.4 24.3 -0.7 21.3 2.2 3.1 25.9 201.8 2.9 18.6 15.0 15.4 -1.2 25.7 12.7 EV / Revenues NET CASH FLOW (a+b+c) 142 -119 -3 49 18 35 Div Yield (%) 1.4 -1.4 3. PCG RESEARCH Cash Flow Statement (Consolidated) Key Ratio (Consolidated) (Rs Cr) FY14 FY15 FY16 FY17E FY18E FY19E Key Ratios (%) FY14 FY15 FY16 FY17E FY18E FY19E Reported PBT 218 203 220 282 342 414 EBITDA Margin 24.PCG RESEARCH P a g e | 11 .3 -0.2 25.6 18.5 4.0 1.7 78.2 -1.7 13.1 155.3 94 -87 -170 115 135 123 Interest Coverage 66.8 Tax Paid -83 -56 -63 -79 -96 -116 Solvency Ratio OPERATING CASH FLOW ( a ) 111 71 141 130 180 198 Net Debt/EBITDA (x) -1.7 19.0 16.5 58.8 18.2 24.8 19.4 25.0 10.5 167.3 242.3 22.0 Non-operating income 39 46 32 41 45 53 CEPS 9.5 9.6 16.9 3.3 -0.0 19.3 2.8 26.

PCG RESEARCH Price Movement Chart 300 250 200 150 100 50 Apr-16 Sep-16 May-16 Jul-16 Feb-16 Dec-15 Jun-16 Oct-16 Nov-16 Jan-16 Dec-16 Mar-16 Aug-16 Rating Definition: Buy: Stock is expected to gain by 10% or more in the next 1 Year.PCG RESEARCH P a g e | 12 . Sell: Stock is expected to decline by 10% or more in the next 1 Year. Private Client Group .

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