At first glance, Shilpa Medicare’s Q1FY15 results appear to be disastrous.
The revenue grew ~22% YOY but declined ~17% QoQ to Rs 138 crore. The EBITDA margins slumped ~248 bps YOY to 21.2%.
The EBITDA grew ~9.3% YOY (down ~16.9% QoQ) to Rs 29.5 crore. The PAT slumped ~25.7% YoY (down ~32% QoQ) to Rs 16.8 crore. The net margin collapsed to 12.1% in Q1FY15 v/s 19.8% in Q1FY14 (14.9% in Q4FY14). The tax rate in Q1FY15 was also substantially higher at 30% v/s 13.9% in the preceding previous corresponding period & 21.3% in previous quarter.
Daljeet Kohli, the originator of the stock idea was also shaken by Shilpa’s results and couldn’t hide his disappointment.
In a terse note, Daljeet admitted that the results are “significantly lower than expectations” and a “disappointment”.
However, Daljeet was quick to put his finger on the root cause of the problem. He explained that there was a “spill over” of some revenue from Q1 to the Q2 quarter. He pointed out that if the past 8 quarters were analyzed, it was clear that Q1 is normally the weakest quarter. He also explained that there is volatility in revenue between various quarters implying that there is a tendency of revenue getting spilt over to next quarters.
The fall in the top line also affected the margins, he added.
Daljeet emphasized that the Q1FY15 performance was an “aberration” and that growth would come back from next quarter onwards.
Daljeet also pointed out that Shilpa Medicare has a past track record of robust growth. It has a healthy balance sheet and there is an improvement in its return ratios. It also has a strong product pipeline of mainly oncology products. Also, the US FDA USFDA approval for the Raichur plant (which is likely to be in the near term) & entry into formulation business post Jadcherla formulation plant would be key triggers for the stock.
Daljeet concluded by adding the comfort that he continues to remain positive & has faith that Shilpa Medicare has the capability to show robust growth.
Personally, I think Daljeet’s advice is quite sensible. If you are convinced that the underlying story is strong, there is no reason why a quarter or two of bad results should cause you any anxiety. The same sage advice was given by Sanjoy Bhattacharyya in the context of IPCA Labs. We also saw this play out in JB Chem and we reaped a rich harvest from that stock.
So, I am just going to continue my SIP as before.