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Monday, October 14, 2019

Fredun Pharmaceuticals ltd: Scuttlebutt and Analysis

Scripscan : Fredun Pharmaceuticals ltd
Cmp:215
Marketcap:85crs

1.  Fredun Pharma has come a long way by growing at a CAGR of 30-40% and recorded sales of 98crs in FY19. The growth rate is likely to be around 25-30% for the next 2-3 years as management understands the balance between scalability and sustainability.

2. They started way back in the 90s being contract manufacturer to big Pharma companies. Currently contract manufacturing is only 2% of its total turnover. Anti-Diabetic contributes 25%, Anti Cardiac-18%, NSAID 24% and Others -33%. That’s the present mix of sales.

3. They have expanded the production capacity by 530% in the last few years. Company has been systematically investing in its productive Infrastructure by installing additional granulation departments, high speed tableting and blister packing machines. The current capacity utilisation is at 50% and by mid-2020, the utilisation levels would go up to 80%

4. The company’s product portfolio has expanded from having around 63 products in 2007 to 427 products in 2019. The company is registering its products in various countries and over 200 products due for registration within the next 18-24 months. It is set to get a cosmetic license for manufacturing related stuff by September 2019. They are also planning to launch a generic medicine line.

5. Anti-Diabetic products contribute nearly 25% of its revenues. The number of Indians with diabetes is projected to reach 73.5 million in 2025. The direct and indirect costs of treating such patients are currently about US $420 per person per year. If these costs remain the same as they are now, India's total bill for diabetes would be about US$30 billion by 2025.

6. Company is targeting sales of 120 cr in Fy20 and 150 cr FY21. Next 2-3 years focus will be on marketing/registering the products. The company has the right mix of value and volume-based products.

7. The company is targeting Africa and considers it to be a huge potential market can lead to good future growth. Sri Lanka also is another market which the company believes can be huge. They are registering some products for high potential Russian market too.

8. The Net margins of the company are likely to go up from 3% to 8% in the next 2-3 years. The company is in talks with banks and investors for some Working Capital, which is required to scale up. It could either be in the form of equity or debt.

9. Going forward in the next 2-3 years, the company expected to do a business of around 60 crores alone from Ointments and pellets. Most product developments are in the final stages. Current order book in hand is 45 crores.

10.  The inventory of the company has increased from 18Cr to 40cr and is likely to remain high since the company has been buying in bulk (for 4-6 quarters) to get discounts which leads to savings. Operating leverage will come into play once it crosses 170-180 crs of sales.

11. Company is having no concerns regarding Africa client payments or bad debtors. Company deals with parties which are largest or second largest in their respective countries. The total debtors of only 13crs on 98crs sales is a testimony of that.

12. The company has enough capacity to deliver 230crs of sales so for the next two-three years, it doesn’t need to expand capacities. Some machine and plant up-gradation cost would be there.

13. The recent 4% pledging was for secured loan collateral and the company has no plans of pledging more shares. There is no risk of existing pledged shares getting dumped in the market by the lender.

Our Take: The management of Fredun Pharma has the good habit of putting conservative guidance and over-delivering it by quite a margin. The first-quarter profit to us seems pretty deflated. The company rather than capitalising its R&D expenses showed them as expenses and took a hit on P&L. We feel it would have been better to create a subsidiary and do the activities related to research & development there. It would have led to showcasing the true standalone numbers as well as given them the chance to raise fund in the subsidiary which wouldn’t have led to dilution the parent company’s equity. In the next 3 years, we feel it would hit top-line of 200crs along with net margins of 8-9%. Altogether an interesting small cap bet with a lot of potential.

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DISCLAIMER - The writers are partners of SA Investment Advisors, a SEBI registered investment advisory firm. They along with their family members may have position in the company discussed above.

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