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.
- 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’.
- 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.
- 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.