Stock Pick From The Pharma Sector

HERE IS WHY:

• A consistent dividend paying company over the last 10 years
• Has shown fantastic growth in its revenues and net profit
• Has set up a new manufacturing facility primarily for exports

In an uncertain environment, the pharma sector remains a pillar of stability for investors. There are many hidden gems in the sector if one looks beyond the Large-Cap companies. Arvind Remedies, which is a pharma company based in Chennai, is one such company that has caught our attention. Being a small company with the ambition to export drugs to the US market, its future remains robust and there is a good probability that the business performance would improve significantly going ahead. This Small-Cap company is yet to be tracked by the street analysts, and hence our readers are getting an early bird opportunity to invest in this scrip.

Arvind Remedies was founded in 1988 and was listed on the stock exchange in 1996. The company currently has three manufacturing facilities located near Chennai. At Kakkalur, it has four manufacturing units for its allopathic and ayurvedic segments. It also has a brand new unit at Irungatukottai, which will predominantly be used to export drugs. The company has said that it will apply for a license from major agencies like the USFDA, MHRA, etc. and will apply for its first ANDA this year. This new capacity is expected to commence this fiscal and would lead to a multi-fold increase in its manufacturing base. It will also give access to the injectable segment, which is a growing segment in the regulated markets. From this capacity, the company will be able to manufacture 4.5 million of injectable ampoule and vial units once the new capacity comes to life. Coronet Labs is its third facility located near Roorkee, which the company acquired in 2011.

On the business front, the company has its own branded as well as generics products retail business, which contributes 15 per cent to the topline. It also has an institutional business, in which it sells its products to governments, PSUs and hospitals. This segment contributes 60 per to the total revenues. Arvind's exports and contract manufacturing segments contribute the remaining 15 per cent in the topline. Its client list in contract manufacturing includes top names in the industry such as Sun Pharma, Novartis, Cipla, etc.

While it took Arvind 20 years to cross a turnover of Rs 200 crore, but the next Rs 300 crore came in just three years’ time. It has been a dividend paying company over last 10 years. In 2009, the company saw some liquidity issues due to the rise in the current liabilities. It addressed these concerns through the issuance of fresh equity capital and divestment of its non-functional Haridwar manufacturing facility.

Post this development, the company has shown a fantastic performance, with its topline and bottomline showing a compounded annual growth rate of 33 per cent and 59 per cent respectively by the end of FY13. In the four years from 2009 to 2013, the company has reported a rise in overall profitability. For FY13, its revenues grew by 51 per cent to Rs 704 crore and the net profits by 108 per cent to Rs 43 crore on a yearly basis. The EBITDA margins also improved significantly by 500 basis points to 20 per cent.

On the valuations front, the stock is trading at a TTM price-to-earnings multiple of 3.4x, which is very cheap for a profitable pharma company. We recommend that our readers enter the stock at a CMP of Rs 31 with a target price of Rs 36 in the next one year for returns of 15 per cent.