In The Pink Of Health - Twilight Litaka Pharma

In a market which is marching briskly to test its all-time highs, if you come across a scrip that is growing at three-year CAGR of 34 per cent and 32 per cent in the topline and bottomline and yet available at a PE of 9.6x of its trailing numbers, it does make sense to pursue it further. We are talking about Twilight Litaka Pharma (TLP) and this is exactly what we did once it was short-listed for our analysis column. In a bid to get more insights on this pharma company we had a tete-a-tete with Gopal Ramourti, Managing Director, Twilight Litaka Pharma (TLPL) at their Andheri headquarters.

The initial discussion itself threw up some interesting points in the course of which Ramourti informed us that the broader business segments for the company included contract research and manufacturing services (CRAMS), domestic formulations, and exports. He further stated that the CRAMS segment has been the biggest contributor in terms of revenues and accounts for 57 per cent of the sales of the company. “TLPL has been involved in contract manufacturing for large companies in the pharmaceutical space which includes Novartis, Wockhardt, Cipla, Lupin, Serum, Pfizer, Herbalife, etc,” Ramourti informed.  However, with top client contribution at 8-10 per cent, the segment is fairly de-risked and none of the revenue is skewed in favour of any single client. The company manufactures drugs and formulations in the form of tablets, ointments, liquids, capsules, etc. and focuses on categories such as anti-inflammatory, anti-asthmatic, antibiotics, vitamins, antioxidants, etc. That apart, TLPL has also been working on the food and nutrition space over the last 12 years. However, general medicine forms 80 per cent of the total CRAMS revenues while the balance 20 per cent is derived from food and nutrition.

As the discussion moved forward, Ramourti introduced us to the domestic formulation business. This segment contributes up to 35 per cent of the total revenue and has five divisions. This includes Centrum (35-40 per cent to segment revenue) and Nucleus (25-30 per cent) which together focus on servicing pediatricians, physicians, surgeons, and orthopedic surgeons. It has a number of life-saving antibiotics used in surgeries and ICUs. The company’s Nutra division (10 per cent) is exclusively devoted to nutritional therapy that helps improve the quality of life. [PAGE BREAK]

Zenith (10 per cent) has products which cover the areas of dermatology and gynecology. Meanwhile, TLPL (15 per cent), also known as the mother division, covers the products of all the other divisions and is responsible for undertaking all the business initiation activity in any new territory. The third segment is that of exports. It contributes the balance 8 per cent to its revenues with export of products to regions such as Africa, South America, and South East Asia. Though TPL exports products to over 40 countries, around 6-7 countries make up for almost 70-80 per cent of this segment’s revenues. Recently the company has entered the regions of UK and USA and has started exporting food and nutrition products.

There are several reasons why we believe this company should do well. The first factor to be noted is that TLPL has been a consistent performer and has grown every single year since FY05. In fact the company has grown at a three-year CAGR of 34 per cent and 32 per cent in topline and bottomline. This we believe is quite commendable considering the overall pharma industry witnessing growth of around 13-14 per cent. As such, the management is optimistic about maintaining similar momentum in the coming years. Secondly, though CRAMS is a low-entry barrier with low-margin business, one should note that there is a huge potential for this segment in India considering the fact that the global pharma majors are already looking at cheaper destinations to outsource their manufacturing activities due to cost pressures. If that is the case, companies such as TLPL are bound to benefit. Besides, considering the company’s experience in CRAMS, proven track record of delivering on time, quality, consistency, and enviable clientele list, it certainly looks like it has an edge over the other players.

Further, while CRAMS has been doing well, TLPL wants to now focus on its own business i.e. the domestic formulation segment where it currently has close to 200 formulations. This we believe augurs well for the company since the aggressive perusal of this segment will help it push the overall growth curve of the company and will give the much-needed push to the margins, thus improving profitability further. Also, TLPL’s core competency is its expertise for manufacturing protein-based products. The company wants to stick to its core competency and position itself as a food and nutrition player. Currently 30 per cent of its revenue is obtained from food and nutrition products and the company aims to increase this contribution further. This includes the CRAMS’ revenue as well. According to Ramourti, “Food and nutrition now currently post 30 per cent of the total revenues and in the next two to three years we expect it to grow to 50-60 per cent.”[PAGE BREAK]

The other factor that should help TLPL drive its domestic formulation business is its focus on rural markets, now growing at a brisk pace. Ramourti explains, “Around 80-90 per cent of our domestic formulation revenues are generated from rural markets or the non-metro regions and these markets are witnessing 30 per cent plus growth rate compared to the overall growth rate of 13-14 per cent.” On the export front, the company has taken a major step by entering the prime markets of US and UK for supplying food and nutrition products. That apart, TLPL is also raising funds of around Rs 168 crore (Rs 138 crore through issue of securities and Rs 30 crore by way of warrants). This fund raising is expected to be completed in the current fiscal to be used towards augmenting its working capital requirements and for strategic acquisitions, mainly brands, in the coming period. But on the flip side there would be a huge equity dilution of at least 45 per cent going forward.

The other concern is that TLPL’s debtors are quite high at almost 36 per cent of its FY10 sales, thus impacting working capital and leading to increased borrowing. However, the management is confident about reducing the number of days of credit and by doing a sharper follow-up to ensure the flow of funds in time.

As for the company’s financial performance, in Q1FY11 TLPL’s revenues increased by 46 per cent to Rs 151.85 crore while profits increased by 75 per cent to Rs 12.53 crore during the same period. For FY11 the management is optimistic of achieving revenues of Rs 650-700 crore and profits of around Rs 54-56 crore. At these estimates the scrip is available at a PE of 9x and EV/EBIDTA of 8x (after adjusting for dilution), while a peer company such as Dishman Pharma is available at 14x and 10x respectively, thus making TLPL look like an attractive buy at its current level of Rs 171 with a one-year target of Rs 230.