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Company Background

Shilpa Medicare Ltd (SML) started its operations as API manufacturer in 1987 at Raichur, Karnataka. SML deals in high-quality APIs, intermediates, formulations, novel drug delivery systems, biotechnology and specialty chemicals among others. SML specializes in oncology, Anti-RetroVirals (ARV) and other therapeutic areas such as multiple sclerosis, immunosuppressant therapies. SML operates six manufacturing facilities across Raichur, Telangana, Hubli and Austria and has 4 R&D units in Raichur, Dharwad, Bangalore and Hubli. The API segment constitutes 55% & formulations segment 27% of standalone FY20 revenue.

Investment Rationale

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SML range includes 44 oncology and non-oncology APIs. Leveraging on strength in the API space, SML has forward integrated into high-margins formulation business backed by sturdy product pipeline of 16 injectable dosage forms, 19 oral solid dosage forms and 13 formulations under SML’s subsidiary Shilpa Therapeutics Pvt Ltd.

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SML supplies more than 30 oncology APIs for various regulated markets including USA, Europe, Japan, South Korea, Russia, Mexico, Brazil, and other emerging markets.

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SML, successfully entered US Generic formulations market through the launch of Capacitabine&Azacitadine in FY16-17. Revenue from this segment recorded CAGR of 46.48% since 2018 to Rs.191crs in FY20. This has also led to change in revenue contribution of this segment from 16% in FY18 to 27% in FY20. Currently, SML formulations product pipe line has total 22 ANDA (abbreviated new drug application) of which 13 had been approved and 9 pending approvals as on June 30, 2020.

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SML had received two Establishment inspection report for API unit & one for formulations. The company has undergone 8 USFDA inspections till date at its Raichur (API) and Jadcherla (Formulations) plants.

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SML would continue to explore organic and inorganic growth to strengthen manufacturing and research. In FY21, the company acquired FTF Pharma an integrated drug development company which would enhance its R&D facilities as well as increase its product portfolio.

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For the period of FY18-20, SML’sconsolidated net sales and net profit grew at a CAGR of ~7% and ~22% respectively. In Q1FY21 SML’s consolidated net sales grew by 38.44%, its operating profit and PAT grew by 128.30% & 488.35% respectively due to its high margin formulations segment contribution to sales. In FY2O, net sales and PAT grew by 23.80% & 39.10% respectively. The company has timely rewarded its stakeholder with handsome dividend.

Recommendation

A leading player in APIs and an emerging player in oncology formulations, with robust profit and operating margins, backed by strong product portfolio bode well for company’s future. SML has lined up investments over the next two years towards capacity enhancements, including de-bottlenecking.

In FY20, The debt/equity ratio remained low at around 0.2x thus reflecting strong balance sheet. At CMP of Rs. 558.45the stock trades at ~19 times of its FY22e earnings. Hence, we recommend a BUY on the stock with a Target Price of  Rs. 685 with an upside potential of ~23% from the current level with an investment horizon of 9-12 months.