Stock Pick From The Health Care Sector

Sowmya K / 30 May 2013

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a six months to one year horizon. The recommendation is based on a fundamental analysis of the company. The company recommended as the Choice Scrip for this issue is a company with the Health Care Sector.
HERE IS WHY:
  • Capacity expansion to be completed by Q4FY14
  • US FDA approval for its export-oriented unit, the only such of its kind in India
  • No pledged shares by promoters
  • Robust guidance and margins expansion

Small-Cap counters have witnessed a massive drop in prices after the recent fall in the markets. Though the dim business outlook was the major reason behind this fall, a higher proportion of pledged shares also took a toll on the prices. The drop in share prices of these companies triggered margin calls on the pledged shares, which lead to an even greater fall. Our scrip of choice, Poly Medicure (Polymed) is a Small-Cap counter. The share price of Polymed is firm despite the recent carnage, indicating that the company has higher intrinsic value.

Higher growth is expected in the company on the back of a rise in export orders and capacity expansions. Its promoters have not pledged their shares, which adds to our conviction in the stock. Polymed’s revenues have increased three-fold in the last six years and its future promises to be bright.

SHAREHOLDING PATTERN AS ON 31/03/13
Indian Promoters 48.44
Foreign Promoters 0.26
Bodies Corporate 34.41
Public 16.89
Total 100.00
Incorporated in 1995, Polymed is a medical devices company based in Faridabad, Haryana. It has three manufacturing units located in Ballabgarh (Unit I and II) and Haridwar (Unit III). Unit II is an export-oriented unit and the only US FDA approved unit in the medical devices sector in the country. The company manufactures specialised medical devices like cannulae, blood bags, catheters, needles, etc., which are required for infusion therapies, urology, blood collection, etc. J K Oswal, Vice President(Finance) told us that company exports its products to more than 80 countries, which generate 70 per cent of its revenues.

Best Of Last One Year
Company NameReco. CMP(Rs)Gain %
M&M Financial Services 137.00 255.00 86.13%
Berger Paints India 141.00 238.00 68.79%
Dabur India 104.00 156.00 50.00%
Yes Bank 381.00 515.00 35.17%
Jammu & Kashmir Bank 976.00 1257.00 28.79%
CESC 263.00 336.00 27.76%
Glenmark Pharmaceuticals 437.00 558.00 27.69%
IPCA Laboratories 442.00 562.00 27.15%
There are three main reasons that point towards its growth prospects. First, the company is in capacity expansion mode. It is increasing its capacity at the Haridwar plant and is setting up a new a new unit in Jaipur. This will be commissioned by Q4FY14 and would add to its rising topline. Secondly, by the start of FY15 the company will ship its products to the US, which is the largest healthcare market in the world. The third factor is that the company is actively looking out for an acquisition. Oswal mentioned that the company has already given a mandate to consultant Ernst & Young to scout for an appropriate target. Funds for the same will be raised through internal cash flows. It is not clear when the acquisition will take place, but its moves are enough to give faith that Polymed has a good future.

On the financial front, its FY13 results were fantastic, with its topline growing by 20 per cent to Rs 259 crore and the net profit showing a rise of 21 per cent to Rs 23 crore. The debt-to-equity ratio remains less than 1x. Additionally, the company has been generating free cash flows over last few years. The favourable tax regime for the company ended in FY11, despite which it has ended the two following years on good profits. Oswal indicated a revenue guidance of revenues of Rs 300 crore in FY14 and Rs 375 in FY15. He said that the margins are expected to rise as certain loss-making derivative contracts have now expired.

On the valuations front, we believe that the stock is available at a price-to-earnings multiple of 20x its FY14 forward EPS of Rs 24.50. The stock should give returns of 15-18 per cent within one year, and is hence worth investing in. Not to forget, that the company also pays dividends on a regular basis.

LAST FIVE QUARTERS (Rs/CR)

03/13/1312/12/1309/12/1306/12/1303/12/1312/11/13
Total Income 69.12 62.99 62.36 57.78 57.15 55.18
Raw Material Consumption 21.77 20.02 20.18 17.36 14.28 19.31
Interest 0.58 1.88 1.46 1.98 1.98 1.26
Tax 4.16 3.34 1.09 1.18 2.76 2.26
Net Profit 9.25 8.24 3.48 3.05 5.15 4.01
Equity Share Capital 11.01 11.01 11.01 11.01 11.01 11.01

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