Arvind Remedies Ltd was established in 1988 under Dr.Arvind Shah, Managing Director and CEO. The company has 30 pharmaceutical brands in 10 states. They offer various products in GP segments like Analgesics, Antioxidants, Haematinics, Antibiotic, GIT drugs, and also specialty herbal products for diabetes and herbal cream for bed sores and prevention of keloids after surgery or wounds. The stock has a market cap of 397 Rs.Cr.
The world pharma market is estimated to have grown by 2.5% in 2013 to reach the size of US $ 975 bn. While average revenue growth in developed markets was only .36% in emerging markets of Asia Africa Australia and Latin America, the growth was about 10.7%.
United States remains the largest pharmaceutical market globally, and also the largest generics market.
The Indian pharma industry during 2013-14 grew by mere 6.1% and reached size of approx Rs.823 bn.
However it has been globally ranked third in terms of volume and tenth in terms of value. The market is
expected to grow at a compounded Annual Growth Rate of 12% over the next five years.
The key factors influence growth of healthcare sector are growth in population, increasing incidence of
diseases, increasing affordability, rise in insurance and government schemes.
According to their annual report, this will be the company's main focus and growth strategy:
"ARL can play vital role by going for registration of off patented products for exports and developing the outsourcing market. Key strategy will be to focus on the new and latest molecules approved by the authorities and share with top companies who can market these products, focus on additional dosages in large and small volume parenterals and injectables in powder and liquid forms."
Let's take a look at ARL financials:
The world pharma market is estimated to have grown by 2.5% in 2013 to reach the size of US $ 975 bn. While average revenue growth in developed markets was only .36% in emerging markets of Asia Africa Australia and Latin America, the growth was about 10.7%.
United States remains the largest pharmaceutical market globally, and also the largest generics market.
The Indian pharma industry during 2013-14 grew by mere 6.1% and reached size of approx Rs.823 bn.
However it has been globally ranked third in terms of volume and tenth in terms of value. The market is
expected to grow at a compounded Annual Growth Rate of 12% over the next five years.
The key factors influence growth of healthcare sector are growth in population, increasing incidence of
diseases, increasing affordability, rise in insurance and government schemes.
According to their annual report, this will be the company's main focus and growth strategy:
"ARL can play vital role by going for registration of off patented products for exports and developing the outsourcing market. Key strategy will be to focus on the new and latest molecules approved by the authorities and share with top companies who can market these products, focus on additional dosages in large and small volume parenterals and injectables in powder and liquid forms."
Let's take a look at ARL financials:
Arvind's revenues and profits have skyrocketed over the past couple of years, with margins improving significantly even in the face of competition. That is a great sign, the Indian pharma market has grown steadily, but attracted a lot of competition. If Arvind Remedies can expand margins in such an environment. Long-term debt/equity is slightly above 1, which is higher than the industry average, however they have enough current assets to satisfy near term obligations.
There are two major red flags with Arvind Remedies: inventories rising faster than sales (58% vs. 38%), and operating cash flow was negative last year, due to an increase in receivables and inventories. Rising inventories might mean, that ARL is preparing for a good season or that demand is low and the company keeps producing goods that nobody is buying. In this case, I think I will stick to the first option, as they managed this really well in the past.
Valuation
Using a 3 stage DCF model I came up with the following value:
- 16%,18%,20% discount rates
- Long term growth of 20% for the next 5 years, 10% for years 6-10
- 4% terminal growth rate
There are two major red flags with Arvind Remedies: inventories rising faster than sales (58% vs. 38%), and operating cash flow was negative last year, due to an increase in receivables and inventories. Rising inventories might mean, that ARL is preparing for a good season or that demand is low and the company keeps producing goods that nobody is buying. In this case, I think I will stick to the first option, as they managed this really well in the past.
Valuation
Using a 3 stage DCF model I came up with the following value:
- 16%,18%,20% discount rates
- Long term growth of 20% for the next 5 years, 10% for years 6-10
- 4% terminal growth rate
Arvind Remedies valuation
The company looks dirt cheap. Using conservative estimates (20% growth and a 20% discount rate), I arrived at a value of 756 Rs.Cr., which implies a share value of 110 Rs. That's a potential of at least 90% in that stock, and if it grows faster (last year sales and profits grew 40%), it can be a multibagger. With a P/E of 5.8 and P/S of 0.4, the stock looks like a total bargain.
Summary
The stock has been on the run after the company cancelled a planned demerger of it's new factory, which will produce generics for the US market. Arvind Remedies offers a great risk/reward scenario - if it doesn't work out, my stop loss will be hit and I will lose a small amount, however if it continues to grow like in the past, it is significantly undervalued. The stock needs to cross the 60 Rs. mark before I buy it.
Summary
The stock has been on the run after the company cancelled a planned demerger of it's new factory, which will produce generics for the US market. Arvind Remedies offers a great risk/reward scenario - if it doesn't work out, my stop loss will be hit and I will lose a small amount, however if it continues to grow like in the past, it is significantly undervalued. The stock needs to cross the 60 Rs. mark before I buy it.
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