Radhakishan Damani’s Ex-Fav Small-Cap Pharma Stock Is A “High Quality Proxy Play” & Potential 100-Bagger: Experts

It is well known that Radhakishan Damani, the stock wizard revered by Rakesh Jhunjhunwala as a ‘Guru’/ ‘Mentor’, has a strong allergy to Pharma stocks. His portfolio of glittering multibaggers does not have a single Pharma stock in it.

However, important evidence has now surfaced that reveals that even Radhakishan Damani had once succumbed to the charms of the Pharma sector.

As of 1st April 2014, Radhakishan Damani held a chunk of 93,000 shares of Aarti Drugs, a small-cap Pharma stock. However, for some reason, he got jittery and dumped his entire holding in two lots of 68,000 and 25,000 shares on 29th August 2014 and 5th December 2014 respectively.

Prima facie, what appears to have caused Radhakishan Damani to become jittery about Aarti Drugs is the steep surge in its stock price. From Rs. 132 on 1st April 2014, the stock surged like a rocket to a lifetime high of Rs. 813 on 8th April 2015. This means that in just about a year’s time, Aarti Drugs posted gains of 515%. In fact, over the past five years (May 2011 onwards), the stock is an incredible 10-bagger (1078% return).

Obviously, Radhakishan Damani had the wisdom to sense that a stock which surges with such ferocity is bound to give up a lot of its gains. So, he did the sensible thing of skimming off the cream while the stock was still on an upward trajectory.

As usual, Radhakishan Damani was right in sensing that Aarti Drugs would not be able to retain the lofty share price. From the peak of Rs. 813, the stock is presently cooling its’ heals at Rs. 463, having shed 43% of its value. On a YoY basis, the stock is down 34%.

Now, the important aspect that we have to probe is what it is about Aarti Drugs that attracted Radhakishan Damani in the first place and whether it will be able to recreate the magic in the future as well.

This seminal question has been answered by Jehan Bhadha of Motilal Oswal in an initiating coverage report dated 21st July 2015. Jehan has described Aarti Drugs as a “high quality API supplier to formulation companies across domestic and international markets”. He has also pointed out that the Company is a “market leader in most of its top 10 products” and that it enjoys economies of scale.

After highlighting several other salient features, advice is given that “Given the robust revenue visibility that the company enjoys from its dependence on the domestic and global pharmaceutical industry, aggressive expansion plans in high value segments, a 23% CAGR in profits over FY15-17E along with consistently expanding return ratios and dividend payout of 30%; we believe company is available at attractive valuations at 14.3x FY17E.”

Unfortunately, the recommendation has gone awry because Aarti Drugs fell victim to the dip in purchasing power of its clients in Africa and the Middle East owing to the fall in crude prices. The de-rating of the entire Pharma sector has also cost the Company dearly. The stock has lost a whopping 33% since the date of the initiating coverage report.

In his latest report, Jehan Bhadha has again oozed confidence about Aarti Drugs’ prospects. He foresees that “The Company will witness an improvement in topline growth in FY17E when it starts the sale of high value products initially in the anti-diarrheal and anti-diabetic segment viz. metformin and later in anti-biotics.” He also states that in FY17, the topline and bottomline growth will recover to 14% and 17% respectively. Jehan has projected a target price of Rs. 560 for Aarti Drugs which is an upside of 22% from the CMP of Rs. 460.

It is worth noting that several other experts are also of the same view regarding the prospects of Aarti Drugs.

Ventura Securities has issued an initiating coverage report dated 21st November 2015 in which it has pointed out that the Company’s “Expertise in various chemistries along with backward integration has enabled it to be a cost competent player in a large number of products”.

Anand Rathi has also recommended a buy on the basis that “A high degree of processing efficiency, a high standard of quality and large capacity have given it a good brand name in antibiotics, anti-diabetics, antifungals, anti-diarrhoeals, anti-inflammatories and anti-hypertensive therapeutic segments. The company has incurred capital expenditure to construct facilities for three antibiotic products (fluoroquinolones) and intermediates, and doubled the capacity of one of its major anti-protozoal products. Both these projects would be commercially operational by Q3 FY16.”

Wealth Discovery has expressed a similar opinion about the prospects of Aarti Drugs.

So, based on an analysis of expert opinions, one can confidently say that Aarti Drugs has still retained all the salient qualities that had attracted Radhakishan Damani to it. If the Company gets its act in order and if the macro-economic factors are supportive, there is no reason why the stock should not come back into reckoning as a potential 100-bagger!