Sanjivani Paranteral Ltd. – Changing Business Fortunes, Backed By Technicals

Background: Today the company I am discussing is a very high risk company, has very less promoter holding of around 18.5% and therefore, people with less risk appetite may please move away from this stock story right now. This is not a stock for average risk taker and needs very high risk apetite and therefore, if someone does not have that, one can excuse oneself from this post. Those who decide to read further should ensure that they have nothing to complain about the bumpy rides, if any.

The company: Sanjivani Parenteral is a small (market cap wise not revenue wise though) pharma company that has had an interesting evolution from being a CRAMs player to now a formulations company. Normally, this drastic business model change is always violent for the company’s balance sheet and a lot of them perish during this transformation. Thankfully, this company has managed the transformation extremely well. Though formulations are a high gestation business it has served well for the company as is evident from dramatically improved strong cash flows of the company. Although the OPM are still low because the business is still developing (R&D and brand building), it is showing early signs of uptick. One of the points is that the promoters have a small stake (18.78%) in the business but 1) I am told that promoter’s friend/family has decent stake in the company (via public holding thought cannot be independently verified and therefore, ignored) and 2) this small stake will always keep the option of being taken over open. Furthermore, its important to know that the promoters have actually hiked their stake from 14.64% to current 18.78% in last few years. Though the OPM are slowly picking up the company generates very strong cash flows. Sanjivani has shown good growth in last 2-3 quarters and this growth has come on back of couple of significant developments. Sanjivani recently got a WHO nod for its Dehradun plant (around three quarters back) which manufactures high margin antibiotics. Furthermore, Sanjivani till date has close to 140 registrations and out of that around 60 were received in last three quarters alone therefore, though the topline may seem stagnant for last 2-3 yrs but it is likely to pick up sharply in the coming quarters on back of these extremely significant developments. This is in addition to the WHO approved Navi Mumbai plant. Also, the company is concentrating on increasing exports share in the revenue which is currently at around 10% to high double digits in next few years and this would significantly boost OPM.

Valuations: Sanjivani is currently trading at just 0.25 times sales whereas formulations companies are trading at 5-8 times their revenue and even API companies trade at around 3-5 times sales. Sanjivani is available at 11XFY16 PE and has a very small equity base of around 5.9cr. It has a debt of around 5.45cr. Sanjivani has never diluted its equity and it’s WHO approved plants along with its land assets far exceeds the current market cap. So, at present valuations, an investor would not only get the entire business free but also get it at huge asset discount.

Technicals: This is one of the strongest stock discussed on this blog. The stock has recently broken out of a key multi-year (and last of the many) long term resistance and is now building on its strength. Importantly and significantly, the bigger the resistance the higher the volumes with which it was broken. Now, it is clearly on its way to visit its all time highs of triple digits and I strongly believe that it would eventually break that resistance and will be ready for a huge leg up thereafter.

Clearly, the biggest risk associated with the company is low promoter stake but it also presents a unique opportunity as there could be a faster re-rating if either the promoter increases stake or keeps it unchanged or even decreases its stake because it could make it a real takeover target. Importantly, at the current market cap of just 38cr, the stock is cheaply valued w.r.t its assets and also its peers. Whereas companies like gennex, morepen, syncom forumulations are trading at astronomical valuations of 3-5 times their sales and high double to triple digit PEs, this unknown company i.e. Sanjivani – that generates strong cash flows, have successfully climbed up the value chain (not many small caps can boast this and therefore, management should be applauded for this), has triggers in place for higher growth – is available at just 0.25 times it’s sales and around 11 times FY16 EPS. I strongly believe that the stock could see a strong re-rating on back of its improving fundamental profile which incidentally is backed by extremely strong technical profile.

http://sanjivani.co.in/

God Bless !!!

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.