Stock Pick from Pharmaceuticals sector

Here Is Why 

• Focus on niche softgel segment in the US and UK to drive revenue growth.
• Revenue share from US region will expand to around 30 per cent by FY17 from 19 per cent in 9M FY15.
• Focus on expanding across multiple EU countries to replicate its UK business model.

Marksans Pharma: Right Remedy

In an uncertain environment, the pharma sector remains a pillar of stability for investors. Therefore we have picked up a small-cap pharma company that has successfully turned around and is now moving towards its second phase of the journey, which would be growth-driven. The company’s institutional holding has doubled from 7.6 per cent to 14.5 per cent within the last two quarters and hence we see an opportunity to invest in this scrip.

Marksans Pharma is in the OTC and prescription drugs sector with wide-ranging applications across various fields. The company sells OTC and generics in the UK through its two acquisitions Bells & Sons (OTC) and Relonchem (generics) respectively with a largely even split between the two segments. UK accounts for around 42 per cent of the company’s consolidated revenues. Its CRAMS segment constitutes 26 per cent of the revenues with a focus on highly specialised molecules like narcotics, which command higher margin. The company is now focusing on expanding beyond UK as also rolling out its SGC portfolio across multiple EU countries and seeks to replicate its UK business model in these new markets.

To survive in the highly competitive regulated markets, the company has targeted the low competition niche softgel segment in the US and UK. In the US, the company has received one approval from the USFDA for softgel products out of a total of eight approvals and is waiting for another 10 softgel approvals out of the total 11 pending approvals. While MPL does not anticipate any new approvals in H1 FY16, it remains hopeful of obtaining 2-3 softgel approvals in 2H FY16 or early FY17. Overall, with the current set of approvals, the management remains positive on clocking USD 35-40 millon (Rs 225-250 crore) sales in USA by FY16 with attractive margins of around 25 per cent.

The company’s US business has grown by around 81 per cent to Rs 120 crore in 9M FY15, driven by market share gains in existing products, especially Ibuprofen Rx and softgel. Therefore, revenue share from the US region increased to 19 per cent of the total revenue in 9M FY15 as against 15 per cent in FY14. It expects to expand to around 30 per cent by FY17. In 9M FY15 its consolidated revenues grew 33 per cent to Rs 626.3 crore, EBITDA grew 65 per cent to Rs 146 crore, and PAT grew 38 per cent to Rs 84.4 crore corresponding to the same period of the last fiscal year.

The company continues to reiterate its high-margin potential with consolidated 9M FY15 EBITDA margin having expanded by around 450 bps on a YoY basis to 23.3 per cent. Given the growth momentum and steady margins, we are positive about the prospects of the company. On the valuations front, the stock is trading at TTM PE of 23.3x with an EPS of Rs 2.50. We recommend taking an exposure in the stock with expectation of 30-35 per cent growth in the next one year.