Mangalam Drugs And Organics – Changing Business Fortunes, Backed By Technicals

Background: Mangalam Drugs and Organics (MDOL) is a pharma company that was set up in 1972 as part of the Mangalam group. MDOL manufactures bulk drugs, and organic and inorganic chemicals for Antimalarial and Anti-retroviral (i.e. Anti –AIDS) usage. The Anti-retroviral was added in the portfolio recently, though in Anti-Malarial APIs it’s one of the biggest players in India. Let me just pause here for a minute to first highlight the glaring issues that’s there in the company. Firstly, a lot of the promoter holding of 42% is pledged and the company has huge debt/equity ratio, have made losses in the past and therefore is not paying dividend. Given this background, it should be clear that this stock is not for average risk taker and therefore, if you do not have a very high risk appetite, then this stock is not for you.

The Company: Starting from a single product company a couple of decades back, MANGALAM has come a long way and has created a niche for itself in Antimalarial with it becoming one of the Largest manufacturers in Anti-Malarial APIs in india and now Antiretroviral drugs helping to address therapeutic needs worldwide. The company is manufacturing APIs and Intermediates from its WHO-GMP certified plants in Vapi. Mangalam has also signed a pact with the prestigious Bill Clinton Foundation under their Fight Malaria Program for supply of anti malarial bulk drugs worldwide. Since the company’s major activity is to supply Anti-Malarial APIs, a combination of WHO funding slowdown, lumpy forex fluctuations and debt created a lot of problems for the company in the past and that took the company into losses. But in the last 18 months a lot has changed in the company’s fundamentals. The company got a two year moratorium on debt and last year WHO’s anti-malarial funding got a strong boost. This not only improved the earning profile but also cash profile of the company. The company has been consistently filing DMFs. Quite recently, in Feb they got approval for one of their Anti-AIDS (Tenofovir) API with another two expected to come in the next two quarters. With these approvals, the objective of Mangalam is to become an established player in Anti-AIDS APIs too and finally eye that lucrative WHO Anti-AIDS funding and that should certainly give a major fillip to the earnings. The company normally works with an EBITA margins of around 8-10% on an average and the cost of its debt is around 13%, though its important to note that company does not have any plans to raise any further debt. Furthermore, with enough spare capacity there is no capex planned for FY16 as well. Mangalam has a host of marquee clients like IPCA, Cipla, Ajanta Pharma etc.

Valuations: Normally pharma companies are valued at serveral times sales with PEs in high double digits. MDOL on the other hand is valued at just 0.25 times expected FY15 sales of over 200cr, with a trailing four quarter PE of less than 8 (with the last quarter of FY13 EPS of 2.95).The company is expected to come out with its highest ever annual turnover at more than 200cr (as per my research they have crossed 200cr sales for the year, but how much, we’ll come to know at the time of results) for FY15 with OPM of around 8.5%. This should be followed by around 15-20% growth, the following year too. Last month even Crisil upgraded its debt rating for MDOL which vindicates the changing fortunes of the company. Promoters have more than 42% stake with almost 72% of their stake pledged (but important to note is that in the last quarter the pledge was more than 98% so the pledge has actually reduced). Mangalam also generates very strong cash flows. Recently, IPCA has been shedding its stake in the company and are now left with just 4.6 lacs shares and this is actually a good news. IPCA seems to be stuck with the stake for last so many years and its, but natural, for them to sell out as it was only a financial investment and more importantly IPCA themselves have to put its house in order. I believe once all the remaining quantity of shares are offloaded and absorbed by the market, the upmove could be a lot stronger.

Technicals: This is more of a technical driven recommendation. The stock has given a 10 yr breakout. Technically it’s a brilliant stock and after today’s close, its become even stronger. I was anxiously waiting for a close above today’s level to recommend this stock and now that it has come along with highest ever weekly closing, I think the re-rating could get even stronger from here. Given this background, I believe from the current levels downside is strongly protected and a new fresh upside is just opening up.

Addressing Concerns – A Snapshot

I have tried to address the concerns that I highlighted in the first paragraph one by one.

  1. Debt – Yes, debt is high, but its comfortable. The Interest coverage ratio is fine and with improving earnings this is only going to improve further, so it’s a bit comfortable situation to be in and given that there are no plans to raise further debt and also given the fact the interest rate cycle is now turning downwards, this concern is addressed to an extent. Also, this point is vindicated by recent CRISIL upgrade where CRISIL upgraded MDOL’s long term debt rating to ‘Stable’.
  2. Promoter Pledge: Till last quarter more than 98% out of 42% of promoter holding was pledged. But we have to notice that last quarter they released quite a few shares from the pledge and now around 72% of promoter holding is pledged. This downward trajectory is inspiring but more importantly, since the stock price is moving up, there is no chance of promoter’s pledge stake being sold by lenders. So this promoter pledge is a non-issue now.
  3. IPCA Stake – IPCA had around 14 lacs shares till Dec 14 end and being more of a financial investment, they were selling these shares in the open market. Till their last disclosure, that was made on 22 Apr, they have sold around 9.5 lacs shares with just 4.6lacs shares remaining and in all likelihood whatever they want to sell (even if entire stake), they will sell it in next couple of weeks. The market has absorbed all the supply and once this supply is exhausted, the upmove could become even stronger. IPCA selling has taken off this overhang and is therefore, positive.

Ofcourse, the company has challenges, but if the investors/traders look at these challenges one would realize that more or less then challenges are addressed and therefore, the relative risk is now mitigated with numerous positive developments w.r.t WHO funding, no further debt, CRISIL upgrade and most importantly turnaround of operations on back of tremendous growth. To top it all the stock is available at throwaway valuations and this valuation gap will start filling up now, giving strong upsides from the current levels and let’s not forget that the company has very strong cash flows.

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.

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49 Responses to Mangalam Drugs And Organics – Changing Business Fortunes, Backed By Technicals


    A good pick from pharma sector.

  2. Goodluck2015 says:

    Wow.., I have this comp shares since 2 months .., thanks ace for identifying this gem. My friend also very bullish on this.., Ace u got this at rite time..

    • please do not name other people without their consent. Its may not be right, therefore, edited your comment.

      • Goodluck2015 says:

        Got you Ace, point noted.., thanks .., can you throw some light on Godavari Drugs Pls?

        • not too keen on it now because, there’s no clarity on the size of the order that improved their earnings profile. i dont know whether its recurring order, is there any part of unexcuted order left or not etc etc…so the way we got positive surprise, i dont want to get negatively surprised because given the liquidity it would be difficult to get out. please try to get a clarity on their order book and then take a call. once we know the unknown variables, then taking an informed decision is easy.

  3. ace sir yesterday i had talked with the Freshtrop CS. I told him that people are not too posative on your company after the unseasonal rains. he replied that do not trust on people 99% of the people do not know anything about the company, instead of that whenever you have doubt talk to us directly, also we have given the clarification on BSE also. he also told that we have some posative effect also of unseasonal rains. we have got better export prices for our products and he also told that when unseasonal rain came most of our export of grapes was already over and many of our containers where already shipped so we had marginal effect on our export targets but yes targets ware not met but by better price realization the effect will be very less and if q4 of fy 16 will be good than the overall profitability of the company will not be affected at all.

    i asked him that company has only 6 to 7 months of fruits exporting period why don’t the company goes for some common fruits like banana or papaya ?
    he told that we cant directly buy any fruit and start exporting. for this there lies a number of factors like demand, supply, quality, profit margins our capacity etc and also it takes time to add a new product, first we send the samples to the customers and than after that we start exporting slowly and if improved than we increase our capacity.

    than i asked him at what capacity you are currently working on and what are the future expansion plans?
    he replied we are currently working on full capacity and there are currently no expansion plans in line. but he told that we have increased the second line in food processing 6 to 8 months back. he told that previously when suppose mango is in processing and pomegranates comes than first we would have to finish mango processing and than we can start pomegranates. but now with the second line installed we can process 2 fruits at a same time.

    he also told that just wait for the freshtrop results ( the tone in which he said just wait for the results it send positive vibes to me). i think we have a good q4 ( even better than last year q4 just my assumption based on the tone he said ) in line.

  4. abhishek says:

    HI Ace, what are your views on Makers Lab.
    – Market Cap only 30 crores, revenue above 70 crores (compared to any other pharma stock where the ratio of sales to Mcap is less than 0.5 levels vs. 4 times in the case of Makers)
    – Ultra Marquee promoters group (Promoters of IPCA lab are the promoters of Makers Lab),
    – A plain vanilla generic drug business – no risk of company going out of business in long term.
    – Debt Free.
    – Floating stock only 40%, worth 8 crores. To give you a hint, it will just take 40 people like me to hold 1% worth of stock of 20 lacs each to easily capture all the available quantity.
    – The most interesting part – This company holds -.08% of IPCA lab, which itself is worth 7-8 crore, this means out of market cap of 18 crore, you are paying only 10 crore for Makers Lab, rest is Investments alone. Also, any appreciation in price of IPCA lab will by default increase price of Makers.

    • if i were interested in IPCA, i would buy IPCA. moreover, i am not keen on makers… debt free still no dividend, very erratic OPMs and very less too and valuations also not appealing.

  5. Aravind says:

    Well it was Gujarat Themis first and now its Mangalam Drugs. Focussing on Pharma sir? Is this the time for India to become a big pharma bulk exporter? Or select companies are doing well, since on the P/L of many small ones that supply to the big 5 are all showing some 1000% growth in volumes over the last 2-3 years suddenly. It was only R&D and Generics that were going at the start of the decade now bulk looks great.

    • normally, when an industry moves higher, the momentum takes with itself a lot of smaller players higher too and yes, bulk drugs are now coming into lime light though their valuations would always be inferior to formulations based companies.

  6. hafizul09 says:

    Hello Ace ji, Thanks for another good pick in Pharma sector…….was looking at it this before but was busy adding more of Gujarat Themis…….although no more significant cash left after adding more of GTBL….but wanted to know one thing…… u know I am already invested in GTBL…which option will be better at present situation…1)Adding more of GTBL or 2)Buy new shares of Mangalam…….I know u do not do portfolio management but I want to know which will be a better option…..if ur answer is ‘one which investors is comfortable with’…then my response is I am comfortable with both….GTBL highly convinced …and now Mangalam also convinced seeing the pledging coming down and future potential….Thanks in advance!!!!!!!!!!

    • i dont do portfolio management.

      • hafizul09 says:

        Was just comparing GTBL with Mangalam………OPM is very less 8-9% for Mangalam vs close to 20% of GTBL…….any reason for Mangalam for such less margin and is there any chance of it improving in future..? regarding NPM…although it will not be fair for Mangalam to compare NPM with GTBL as Mangalam has more debt so interest cost is higher than GTBL…but then also NPM of GTBL which is around 15% is double than OPM of Mangalam and 3times NPM(4-5%) of Mangalam……..any reason for Mangalam for such less margin and is there any chance of it improving in future..? Thanks in advance!!!!!

  7. shreeux says:

    Hi Ace,

    Thanks for New gem.

  8. abey says:

    advice me on Dhanalakshmi Bank, a small Bank from south India, is it good to Hold

  9. abey says:

    advice me on Dhanalakshmi Bank, from South India

  10. kk says:

    Hi Ace,
    GTBL and Mangalam are both for long term ?

    • as on date, GTBL is for long term and mangalam is for short to medium term (again as on date)

      • hafizul09 says:

        Ace ji….does that mean u r not confident on Mangalam for long term? is there any issue with it which can affect it in long term? Thanks!!!!!

        • not every stock is for long term…some stocks make very good money in a few quarters and also after a few quarters if the positive developments continue we can keep on holding it…but in the meanwhile there is a strong chance of multiplying the money by 2x, 3x and who knows maybe even more. ultimate objective of investment/trading is to make money… this is a money making opportunity and people who are interested in making money should think of entering…not the ones looking to marry a stock idea…

  11. Ace bhai can u pls issue an article showing your all previous recos n if v can re-invest/average at the existing an request

    • had done that a few months back, will do it whenever i have time but “will not” issue any suggestions w.r.t re-invest or anything as i am not doing portfolio management here.

      • ganesh says:

        ace ji its not portfolio management i think, telling whether it is attractively priced and potentially good stock at present also is not portfolio management. it is your routine suggestions nothing new. anybody interested can take his/her call if comfortable with the price.

  12. arockiaarasu says:

    Sir, your kind opinion on Syncom formulations and Arvind Remedies.

  13. hafizul09 says:

    Hello Ace ji….sorry for asking this qs(knowing that u will not like) but I need the advice very badly…….I am badly STUCK in Lycos(more than 50% LOSS even after averaging)……I just want to know is there any hope of its revival or not…..depending on this I will take my decision and will book loss(if no hope of its revival) and invest the remaining money in Mangalam………..please help me with the advice….I am feeling very helpless with this stock….although this is not the place to be emotional but to be honest Lycos is not allowing me to sleep properly and all the time disturbing mental peace…… please help me with the advice……..being this a public place if u don’t want to advise directly then u can tell it indirectly as well by explaining the issues and any possibility of resoling them by management/promoters in future…..that will also help me taking the decision………sorry for this kind of message but hopefully u understand my present mental situation……..Thanks in advance!!!!!!!!

  14. hardyboy says:

    How is premco global and force motors.what is meaning of statement: company may be capitalising its interest is it a negative

  15. sangram says:

    Wow that was heck of a interview by Simmonds marshal on CNBC.
    They are expecting revenues to grow by20-30%.
    Opm mainly up because of a question in UK which has high margin products
    85% of business constitutes from automotive sector and rest from industrial.
    They have very much diversified customer base. No customer constitute more than 8-9% of sales.
    They are always on look up of acquisitions with internal accurals and small amount of debt.
    Debt stands at 18-20 crores including short term borrowings.

  16. sangram says:

    What do you think of Hindustan motors. The new look ambassador looks awesome. Can it play second innings

  17. Tushar says:

    Hi Ace investor, now since results are out and i guess those are in line with what you mentioned in your analysis. where do you see this share going here onwards. Do you see consolidation happening.

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