Background: The Bulk Drugs is a huge industry within the Pharma Sector and as the complete sector is in strong growth momentum (and is expected to continue for a long time to come), it’s given opportunities to companies that were down in dumps to come out of their mess and start afresh. There are quite a few such companies, but its important that we get into a company that’s of very high quality, run by “smart” management (and ofcourse honest – that’s implicit) and has a bright future, irrespective of industry and stock market tailwinds. Gujarat Themis Biosyn is a unique consortium of three drug Companies – Themis Medicare Ltd., Yuhan Corporation (a company with over 860 million USD in revenue and over 78 million USD in profits) and Pharmaceutical Business Group India Ltd. With Yuhan’s know-how, GTBL became India’s first Company to start commercial production of Anti-tuberculosis drug Rifampicin, which it presently supplies to Lupin.
The Company: Gujarat Themis, went into BIFR in 2008 under the impact of consistent losses and debt. Under the scheme of re-habilitation a lot of operating and functional changes were brought in the company. The Face Value of each share of the Company was reduced from Rs.10 to Rs. 5 and the reduction in the value of equity shares was utilized to write-off a part of accumulated losses of the Company . Themis Medicare Ltd. was inducted as co-promoter of the Company and issued 2928702 shares of FV rs 5 at 10rs each. The induction of Themis as a co-promoter brought in the much needed sting and zeal in the operations of the company. The new promoters also brought in the sole long term customer in Lupin. Lupin’s deal with GTBL changed the fortunes of the company. The contours of this deal were very lucrative for GTBL. GTBL entered into a contract with lupin to supply Rifa (with the technology know-how brought in with another co-promoter – Yuhan Corporation). Lupin gave GTBL interest-free loan for capex that was required to finish the contract. This loan from Lupin was a returnable non-interest bearing loan and was repayable against 50% of the “Conversion Charges” for each invoice raised. So, this deal was beneficial to GTBL in more than one ways. Needless, to say this contract brought in very good topline and bottomline for the company. To the credit of GTBL, with each passing quarter the company has been improving its operating efficiency and it now has one of the best operating parameters in the industry. Now, with the recent announcement of the new supply agreement with Lupin that starts from 1st April 2015 – Mar 2018 the company gets solid visibility to its earnings. This is going to be a bigger deal with the contours almost being same. Lupin would invest in GTBL, though the exact type of investment is not known but it could be either equity/interest-free loans (or something that we’ll come to know pretty soon). Now this deal is significant not just because of its contours but also because the effect it will have on the future of GTBL. This is expected to be a much bigger deal than last time and therefore, it will have a very positive impact on the fiscal position of the company. The company should “very easily” (as per the company) come out of BIFR by this FY thereby removing the clutches of BIFR. And once the company comes out of BIFR, the company will expand to newer products. Additionally, the company is also exploring the possibility of “offshoring” some of the manufacturing of its another promoter, Yuhan Corporation. Given the already established operational efficiency of the company any increase in revenue would significantly add to the bottomline too and the company is expected to clock significant revenue and profit growth in the years to come.
This is also one of those rare pharma companies that works on negative working capital and that’s because of significant “Advance from Customers” and this makes its fiscal profile even more significant. The company has excellent cash flows and has been reducing debt every year now.
Valuations: The company at present market cap of around 63cr is trading at 12 times FY15 PE and 8 times FY16 PE. The company has reduced debt in last couple of years with an interest coverage ratio in double digits and generates strong free cash flows. The company has one of the best efficiency parameters and with the renewed and better Lupin deal, the company’s fiscal and earning position is going to fly in a different orbit. According to the company, they would come out of BIFR (that means a profit of atleast around 7.5-8cr in FY16), by the end of the present FY and after that there would be another round of re-rating for the company. The revenues have grown in the last three years from 8.71cr to present expected revenues of around 31cr and the bottomline has grown from a loss of more than 4 cr to an expected profit of 5.2cr. The company in the first nine months has already given a profit of around 3.75cr and a topline of around 23.3cr. The promoter holding is close to 75% with no pledge.
Technicals: The stock recently gave a 10-year breakout and is looking better and better, day by day. The stock is hardly giving any correction. Even when the nifty slided around 800 points the stock hardly gave up any ground and at the slightest hint of broader recovery again climbed back to highs and created new highs. The stock is looking strong on all time frames now.
The company is certainly very promising no doubt. As per the original plan the company was expected to come out of BIFR by 2018, but instead they would come out by this year (and ofcourse whatever they have achieved so far is way ahead of BIFR schedule), and this is tremendous. They have transformed themselves from a messy affair to a dream affair on back of some extremely strong operational parameters. It’s very commendable that it won the confidence of lupin (that has now renewed the contract on revised terms) and that’s a great achievement for a company which almost died. Earlier their dependence on Lupin was one of the biggest risk but with the new lupin contract, this risk is largely mitigated because now we have visibility for three years . Considering, the strong revenue visibility on back of Lupin deal, possibility of offshoring by Yuhan Corp, and introduction of newer products, the company’s business is bound to fly into a different zone altogether in the coming years. All that we need to do is sit back and enjoy the evolvement of the business. Technically too, the stock is bullish on all timeframes especially long term (as is the focus of this blog). I was hoping to get a better price entry but the stock is simply refusing to move down. People should take their own call regarding entry price, but one thing is sure, that given enough time, the stock should be way higher than it is today, this ofcourse is my strong belief.
Disclaimer: It is safe to assume that I may have some vested interests in the stock. Also, the above stock view is my personal view in individual capacity. For rest, please look at the About page.