The Right Medicine - Ind-Swift Laboratories

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With the increase in patent expiry till FY2015, innovator drug makers are now looking forward to develop new molecules through research and development (R&D) activities. That apart, they are also looking at controlling their costs on R&D by outsourcing the same. The Indian contract research and manufacturing service (CRAMS) providers with their strong track record and better chemistry skills are therefore likely to outperform the other global peers in the same space. Ind-Swift Laboratories (INSL), promoted by the Ind-Swift Group, is looking forward to cash in on the upcoming opportunity and is likely to emerge as a major player in the CRAMS space in the coming years.

Over the years the company has emerged as a respectable supplier of bulk activities in more than 40 countries and has plants built according to USFDA guidelines. The company at present is on an expansion spree and has good capex plans ahead to meet the requirements of its global customers.

There are many bulk drug manufacturers that are present in this market but what gives INSL the edge is that it has chosen those molecules which require greater chemistry skills and hence face lesser competition. In view of this bright future ahead, INSL is in the process of investing USD 5 million to set up a new chemical entity (NCE) as per the USFDA guidelines to make its way smoother for foraying into the regulated markets of the US, EU, Australia and New Zealand. At present INSL exports 40 per cent of its products and services to countries like Eastern Europe, Korea and the Middle East. Previously the company was heavily dependent on a single product called Clarithromycin which contributed more than 30 per cent to its topline.

But the company is on its way to de-risk its dependence and now has more than 30 products in its portfolio. The dependence on Clarithromycin has therefore significantly decreased to nearly 25 per cent in the current fiscal and is likely to decrease further as the volumes of the other products show improvement. Atorvastatin and Fexofenadine are the other two large products of INSL that are now contributing significantly to its topline. On the financial front, the company’s topline stands at Rs 785 crore, witnessing a YoY growth of 33 per cent while the bottomline has witnessed a growth of 17 per cent and stands at Rs 41 crore on YoY basis. One risk factor that remains is that the interest cost of the company is on a higher level and accounts for almost 40 per cent of its operating profit. Its EV/EBITDA is at 4.56x for FY10 which is much cheaper as compared to the other listed players in the same space.[PAGE BREAK]

The company is a dividend paying company and has a consistent history of paying 10 per cent dividend every year since 2006. The company at the current share price of Rs 79.90 trades at a P/E of 3.19x for its FY10 earnings. We believe that with the increased focus on the CRAMS activities this scrip may prove to be a good addition to the investors’ portfolio for a long-term benefit. We have arrived at a target price of Rs 108, thus providing an upside of 35 per cent for a one-year time horizon.