After reading some concall transcripts I noticed two critical things

1> EBITDA margin to improve to ~20% over the longer term
2> They have given a kind of guidance to grow at 25% CAGR for the next 3-4 yrs.

Taking these two into account I get close to 50% CAGR for PAT in my rough model. My understanding of their key strengths.

1> Regulatory compliance: they have huge expertise in handling regulatory issues so no US FDA shocker expected. They have more than 15 yrs expertise in dealing with US FDA without any adverse observations.
2> I believe their R&D capability is top notch. The promoter himself has spent considerable time as R&D head in an MNC pharma firm.
3> API pipeline is very strong and innovative. As mentioned above contract mfg. is also expected to grow strongly given their expertise in complex processes
4> Have not come across any other API manufacturer which is developing expertise in Peptides. These are complex molecules. Business potential looks good but don't know much about this segment neither I have found any management comments.

Some cons:

Management is not yet shown any interest in developing formulations so margin kicker has to come from innovative APIs
Quarterly earnings have been lumpy and will remain so given their B2B focus
Their existing capacity utilisation suggests they need to invest in a new capacity by FY18 for which funds have not been finalised.

All in all a niche pharma company to watch out.

Disc: Have taken initial exposure and will watch closely

is it still a buy at cmp @397=00

The way I look at it, this stock has gone up almost 5 times in last 2 years. To raise 500Cr. 2 years back, the promoters would have to sell 25% of the company and lose control over it. Now they are able to do that selling just 5 odd percentage and keeping their holdings above 50%. It was an opportunity and they took it. So yes the owners behaved opportunistically. However, I would be more worried if Cartica sold than if Salil Singhal sold who is in his 70s. Just my 2 cents.

Hi Varadha,

Thanks for the industry feedback and keep them coming as this piece is invaluable in our research work.

As far as derating in multiples is concerned, MPS is derated by the market already as otherwise you will not find such a robust cash generating company available at reasonable multiples it is available today. What will avoid significant further derating is management's proactive strategy in distributing cash. I feel management is quite aware regarding this fact and so is always keeping one feet on accelerator as far as dividend goes till any future clarity emerges. So with almost 3-4 % tax free dividend yield which is equivalent to parking money in saving bank account, not many will like to part with their holdings in this company especially considering management's past track record in wealth creation. Key is holding on to margins -- 35 % + ebitda -- if there is any faltering in that then it might meet with significant derating. Otherwise every serious knowledgeable investor in the company knows that end industry is at best growing in single digits and play is only on increasing cost cutting within the same end size.

It is heartening to note (so far) that at least last year MPS performed on its topline at par with its peers (specifically, result declared peers). That doesn't take away the fact that it underperformed most of its reasonable Indian peers except last year. Results of Newgen and TNQ will be interesting to compare. Even my concern is rising every passing day -- not with rgds. to derating in multiples -- but the way fund management is handled. No rationale dynamic management can wait indefinitely for opportunities to arise out of air as if you don't catch the opportunities at opportunate time then it disappears equally fast in air. And responsibility rises tremendously when you raise funds equivalent to almost 70 % of your existing scale -- and therefore the pressure to take decision will equally rise when you don't take any decision for such a long time. So far management had the liberty to choose but I am afraid soon management might find itself trapped into a situation when it will have to take at least a token decision. This is because if you are comfortably growing organically then no one will question but if you are faltering on organic growth and having 70 % of your scale to spend for last 9 months then doubts will surely arise asto what you are waiting for ?? A deal is called a deal and is sealed as a deal when both the parties take some steps forward and finally meet to seal up the deal but if one is just waiting for the mouth watering most lucrative opportunity to seal a deal then if there is luck it might come but at most of the times pratical decisions need to be taken by keeping both present and future interests in mind making a trade off between what is best and what is good.

To make a note, Q2FY16 was the first quarter after almost 10 quarters when MPS degrew YoY organically in dollar terms and situation was not so good at subsidiary level too. I am still keeping my fingers crossed and hoping that Mr. Arora finds another Macmillan (both in terms of opportunity size and valuation at which deal is sealed) as otherwise this long time spent will itself act as a question mark.

These are my personal views and have kept my holdings in MPS intact and have not sold a single share nor bought any over last 30 days.

Rgds.

Hi,

Can we get an idea what will be the ROIC of the company post stake sale in Sylvania? That should jump a lot. Hence, PE re-rating likely?