A small-cap Agro-Chemical company Shivalik Rasayan’s (Market Cap: Rs 361 crore) has huge exposure to the pharmaceutical industry and is going to surge in the coming quarters. Currently, it has around 40 percent stake in pharmaceutical company Medicamen Biotech (Market Cap: Rs 310 crore).
Shivalik is gearing up its resources to make APIs (Active pharmaceutical ingredients) which are thus used to make specific formulations A portion of these APIs will be offered to Medicamen itself, which is adding higher worth oncology formulations to its portfolio. On the off chance that these plans demonstrate fruitfully, the weightage of the pharmaceutical business in Shivalik’s valuations should increment. Aside from this present, Shivalik’s administration’s capacity to pivot organizations, a perfect accounting report and sensible valuations request financial specialist consideration.
Set up in 1981, Shivalik is the biggest maker of technical grades of dimethoate and second-biggest maker of malathion bug sprays in India. It has a yearly creation limit of 1450 tons in Dehradun. Taking a gander at the previous scarcely any years’ information, the industry flexibly requests elements that have been great. Domestic limit usage for the two bug sprays has been over 80 percent and malathion, specifically, profited by higher fare deals. Around 60 percent of the malathion created in India is traded to developing nations.
Since Shivalik bargains in technical grade insecticides, we accept that the organization is engaged with the B2B portion in the domestic market wherein customer organizations further procedure the technical grades to usable structures (granules, powder, and emulsifiable concentrates) before offering it to ranchers or sell them internationally. Henceforth, the organization itself has no immediate exposure to export income. It has a constrained forex exposure because of the import of crude material which comprises around 12 percent of the absolute crude material expense.
Shivalik Rasayan’s Huge Stake in Medicamen Biotech
While the bug sprays business is its fundamental working business, our primary intrigue is in Shivalik’s developing introduction to the pharma business. In November 2015, Shivalik, alongside five people acting in the show, gained around 44 percent stake in Medicamen Biotech. This ends up being a vital move. Medicamen has been a turnaround story as at one point it was troubled with huge debt and experienced a powerless margin profile. Since Financial Year 2016, it has seen a generous change in its working measurements, especially after the adjustment in possession.
Set up in 1993, Medicamen works through plants in Bhiwadi and Haridwar, for the most part in the restorative space of beta-lactum anti-infection agents. These incorporate medications, for example, penicillin subsidiaries and cephalosporin. It additionally makes different formulations, for example, folic corrosive containers and ORS (Oral rehydration salts). It is among the key recipients of late climb in maximum costs of 21 medications by the National Pharmaceutical Pricing Authority, which emphatically impacts its contributions for Metronidazole, Ascorbic Acid, Co-trimoxazole, Pheniramine and so forth.
Starting at now, Shivalik has a 39.52 percent stake in the firm while Pharmadanica – a Danish-based provider of pharma items – has a 10.97 percent stake in it.
Medicamen is venturing into oncology items to drive development and is setting up an office in Haridwar that will begin tasks by Dec’2019. The organization’s September 2019 monetary record makes reference to capital work-in-progress of Rs 23 crore, of which a considerable part is committed to the oncology venture.
It is likewise focussed on expanding universal reach, for which, as of late it has obtained controlling stake in an Australian pharma dispersion organization – Opal Pharmaceuticals. This is in accordance with the organization’s methodology of moving from low-margin markets (Africa and Rest Of the World) to high margin ones (United States, Japan, Australia, Europe Nations). The organization is focusing on 5 DMFs (drug master filings) by December 2020. A DMF can allude as a lot of records, submitted to separate administrative power, for the most part, identified with offices and procedures utilized for the assembling of a medication. Data contained in DMF might be utilized to help the medication applications for the assembling or promoting of another medication or conventional drug.
Foraying into Active Pharmaceutical Ingredients Business
Firmly identified with Medicamen’s oncology plan is Shivalik’s arrangements in the Active Pharmaceutical Ingredients Business. Its Dahej plant is relied upon to begin tasks in December 2019. It has a limit of 1500 metric tons with a massive investment of Rs 185 crore. This office will be utilized, among different purposes, to cater to APIs for Medicamen’s oncology items. Not many of the APIs the organization is taking a shot at are capecitabine, docetaxel, cabazitaxel, azacitidine, and busulfan. In the main stage, the firm is doing research on eight APIs and confident of documenting individual DMFs by December 2020. Out of eight APIs, four molecular-based items would be for oncology and the rest for other remedial diseases. When the plant gets a USFDA endorsement, these APIs are relied upon to add to incomes in Financial Year 2022.
To help this arrangement, the organization has selected another Managing Director Dr Vimal Kumar Shrawat who has huge involvement with the field of pharmaceutical APIs, particularly in oncology.
The organization’s Research & Development group is at present taking a shot at 25 distinct molecules for API and work on eight have been effectively closed at the Research & Development level.
The organization’s strategic core business of pesticides has consistently been doing consistently around Rs 50 crore business. Pricing power has helped it to scale incomes as it’s been working at the full limit with respect to a long time now. The center business doesn’t make it an energizing wager. The API division is a genuine shot in the future, which can be its money-making machine going ahead.
Shivalik’s Few APIs to be specific capecitabine, azacitidine, busulfan, and so forth are much popular and expensive. The first expenses $650 a kg. Azacitidine is overly exorbitant, at around $15,000 a kg. Busulfan costs around $12,5000 a kg.
Shivalik Rasayan Key threats
As the organization is foraying into an altogether new business of APIs, there is a raised hazard for the undertaking execution. This hazard factor needs nearer consideration as the measure of huge investment reserved (Rs 185 crore) is noteworthy contrasted with the current all-out resources of the organization (Rs 316 crore). Up until this point, the organization has conveyed Rs 25 crore for the undertaking as alluded from the capital work in progress thing from the accounting report. This gives off an impression of being supported from inside accruals as the debt level is near to zero. The organization’s debt to equity ratio currently stands at 0.05x. In any case, in the event that we take the situation that 50 percent of the venture would, in the end, be debt supported at that point, ceteris paribus, debt to equity ratio would surge to 0.54x.
Another key hazard for the organization and especially its partner organization Medicamen Biotech is the extended working capital cycle. Debtors cycle for Medicamen Biotech is around 130 days. Because of the higher working capital prerequisites, the previous two monetary years income from tasks has been frail for both the companies.
Shivalik Rasayan Future Outlook
At the independent level, Shivalik is changing from maintaining a moderately steady agrichemicals business to a high development pharmaceutical market. This progress is requesting one as far as Research & Development and loaded with administrative and execution chance.
Certainly, notwithstanding, the organization can count on the experience of Medicamen Biotech in this area. Further ongoing senior enlistments add to their ability pool. Furthermore, Medicamen Biotech’s augmentation in the oncology formulation gives a close to a certain customer base. What’s most striking is the valuation at which this open door is accessible. While merged business is exchanging at FY21 EV/EBITDA of 11x, which is somewhat in front of the agri-chem/ insecticides industry average, inferred valuation for the pharma business is appealing.
Valuation of the pharma/non-agrichem business is around 30-40 percent lower than what the market is crediting for the rising pharma/API business of comparable requests. Note that while assessing the equivalent, we have not represented future profit from the oncology detailing and API organizations. We accept these profits would be accretive from FY22 onwards.
These are stunning items, as can be seen as extremely high incentives in nature. We wouldn’t call it complex, as one may suspect, however it has high limitations. In oncology, one needs to deal with a ton of consistency, which the organization is doing pretty carefully and these viewpoints itself make the passage obstructions. By 2021-22, Shivalik can undoubtedly do Rs 150 crore from these APIs with net margins of 20 percent. At present, the organization has a market cap of just Rs 270 crore. Likewise, it possesses more than 40 percent stake in its forward integration child, Medicamen Biotech, which cites a market cap of Rs 400 crore.
Shivalik will cater APIs for Medicamen’s oncology items, giving it a made sure about unending customer. Shivalik likewise has a land worth Rs 50-75 crore in Hardwar, which could be utilized for future extension. The entirety of this makes its valuations way more convincing than what one sees on first look. We stay high on the oncology and related businesses.
There are a lot of inquiries as of now from various sellers on APIs and the organization is sure of getting great business once it starts tasks and has all endorsements set up. The organization has selected industry veterans from enormous pharma organizations in its undertaking to arrive at gigantic scope by 2023.