Prime Stock recommendation: A steady player in the challenging API business
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14 thoughts on “Prime Stock recommendation: A steady player in the challenging API business”
I think you should also update the articles when you give the HOLD recommendation on the first article itself, as many people tend to come back to the original article to see any updates and might miss the new one as the name of the stock is often not added.
The right place to check our calls for updates or otherwise is the PRIME STOCKS page. https://staging.primeinvestor.in/prime-stocks/ This will ensure you don’t miss the content. All subscribers usually do that. This is not primarily a content website. The products are to be used by investors and content supports it. Of course, besides updating Prime Stocks, we send mail alerts when calls are moved to hold or sell. Vidya
Thanks Ms Pavithra for the detailed analysis of Aarti Drugs. How does this compare with Glenmark Life Sciences, one of your other recommended API companies? Why is GLS’s metrics not included in the comparison table presented in the article?
Thank you for the comment and query Sir.
1. Glenmark Life Sciences operates more on the non-commoditised API space focussing on R&D. It’s business is more value rather than volume focussed giving it a better margin profile. Aarti Drugs on the other hand is a commoditised API player which is a volumes game. The trick here is to become dominant in few segments, generate volumes and reap the benefits of operating leverage to generate decent margins and RoCE. It offers a good entry point at our ‘buy’ price considering all its pros and cons.
2. As regards the comparison table, the idea was to compare against large API players and a few with a more similar business profile and not to have an exhaustive list.
Hope this helps.
Thank you
Thanks for the clarification
HI,
If we compare FY 18 & FY 23, we find that operating margin has reduced from 16.2% to 11.3% (almost 6% point), however PAT has reduced very marginally from 6.6% to 6.1%. What has improved during this period. Further, with borrowings & Capex going up, hence interest & deprn impact will increase in future – so will PAT margin will have further impact ?
Hello and thank you for the question.
Between FY 18 and FY 23, the top line went up by 118% but the operating costs have gone up in greater proportion which is why the operating margin was significantly lower. The business of making API s has been under cost pressures and this contraction in operating margin is in line with that.
As regards the difference in PAT, the presence of other income, lower interest cost and a lower effective tax rate in FY 23 as compared to FY 18 (~25% in FY 23 vs. ~35% in FY 18) are what contributed to it.
We are seeing that the cost pressures are abating. Plus the company is undertaking backward integration and debottlenecking efforts and looking at products with better margin profiles. All of this should help margins.
Hi
Thanks for the recommendation and analysis.
my query is apart from Margin expansion from softening of input costs and capacity expansion is there any other trigger for re-rating of the stock? Like what is the companies plan to introduce new products apart from the salicylic acid derm product. (Salicylic acid is not a huge market). Absence of new product pipeline makes the business less attractive.
Hi Sir,
Thank you for the query. You will find details of the new product pipeline on page numbers 30 and 32 of this document.
Hope this helps.
Thanks a lot for the clarification.
Hi,
As always, thanks for detailed analysis. Looks solid business meeting large needs, and a capable / prudent mgmt. have 2 qs – they are operating on commodatized API biz with low margin, serving ~ 65% domestic market with > 60% products imported… Thus they are victim of input cost inflation not able to pass thru etc or geo political tensions etc. Can you share more thoughts on this …. vertical intergration, % cap plans on import etc . Secondly would you recommend pharma focused API player vs diversified to crop / animal science etc
Hi Sir,
Thank you for your comment.
We also have a top end value chain player as well as a non-commoditised API player in our recommendations.
As per latest concall 40% of the Rs. 600 crore capex program will be toward backward integration which should help reduce import dependance and support margins.
At this point we have focussed on pharma focussed API players.
Hope this helps.
Aarti drugs has approximate 600 cr debt but the interest paid is approx 35 crores. Company has capitalized the interest expense which is acceptable as per accounting. Is the extent fine
Hello Sir,
Thanks for raising this question.
If you see the breakup of the debt (consolidated FY 23) it is Rs. 204 crore long term and Rs. 401 crore current liabilities. At the end of Q2FY 23 these numbers were Rs.136 (very close to where it was at the end of FY 22) crore and Rs. 446 crore. So the points to be noted are:
1. The bulk of the borrowings is current liability or short term to fund working capital requirements. This is in line with the business having moderate to high working capital requirements.
2. Also this has gone up in the last two financial years (more towards September 2021 onwards) and the interest cost break up in FY 21 and FY 22 matches this.
3 . The long term borrowings have remained static in the first half of the fiscal and has only gone up in second half of the financial year by about Rs. 70 crore
4. At the end of FY 22 the interest cost on term loans was Rs. 11.7 crore which works out to ~ 8.4% of the long term borrowings at the end of Fy 22.
4. Total interest cost at the end of FY 22 was Rs. 20.75 crore and at the end of FY 23 it has gone up to Rs. 33.29 crore.
This is in line with the increase in the long term debt towards the second half of the fiscal & WC debt as well. Even if capitalised, the quantum of interest quantified will not be alarming.
Hope this clarifies.
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