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Plethico Pharma operates in the fast-growing herbals & nutraceuticals segments.The stock is an attractive investment pick in a bearish market

Beta: 0.2
Institutional Holding: 6.2%
Dividend Yield: 0.6% P/E: 9
M-Cap: Rs 1,309 cr
CMP: Rs 384.3

EVEN WHILE the Sensex has been falling, there are promising stocks which offer both growth and value to investors and provide a hedge against the current downtrend. Plethico Pharmaceuticals is one such defensive stock. The scrip has risen 24% since last year, but has fallen by 13.5% since the beginning of the year till date. The company operates in the herbals and nutraceuticals segments, which are among the fastest-growing niche categories. It has products across 45 therapeutic areas and follows a non-infringing business model.

BUSINESS:
Incorporated in 1991, Plethico hit the capital market in April ’06. The company was originally engaged in manufacture of Drug Price Control Order (DPCO)- controlled prescription drugs in the anti-TB and anti-malarial segments. Later, it sold its products to Shreya Life Sciences. Since then, it has been operating in the herbal and nutraceutical segments, which comprise dietary supplements, functional foods, vitamins, haematinics (iron) and mineral supplements. Nearly 50% of the company’s turnover is contributed by nutraceuticals, 19% by allopathic formulations, 25% by contract or toll manufacturing, and the remaining by its consumer products. Around 68% of its revenues accrue from export markets like Commonwealth of Independent States (CIS), Africa, Latin America, Gulf Co-operation Council (GCC) and South-East Asia. The company forayed into the US — the world’s largest nutraceuticals market — by acquiring a $100-million company, Natrol, in January ’08. Just like Plethico, Natrol also operates in the herbal and nutraceuticals segments, predominantly in the US and in a small way in the UK, through its subsidiary. Established in 1980, Natrol has a strong portfolio of brands in the healthcare and wellness space. It now contributes 45% to Plethico’s total revenue.

GROWTH STRATEGY:
The company’s strategy of shifting focus from prescription drugs to OTC nutraceutical drugs has proved to be successful. Plethico’s growth prominently comes from its export business. It plans to ramp up production of Natrol’s products, which are well-established in the US, and distribute them widely in other key markets. The company focuses on building a strong distribution network to sell its imported products. Its subsidiaries in CIS and the US have given it a good distribution footprint in key markets. Plethico is scouting for more acquisitions to expand its network further.

FINANCIALS:

Over the past five fiscal years, the company has posted 40% CAGR in standalone revenue, which stood at Rs 552.8 crore for the 15 months ended December ’07. Its earnings during the same period witnessed a CAGR of 71.5% to Rs 142.2 crore. Its profit margins took a beating during the March ’08 quarter due to consolidation of Natrol’s business, which has a low profit margin of 10-12%. But Plethico expects the margins for its total business to improve, once it garners more sales from Natrol’s products.
The company is in a fast-paced growth phase, with its profits rising faster than sales. Plethico has been paying dividends every year since the past decade, with an average payout ratio of 25%. This is likely to be the minimum payout ratio in future as well, according to the company.

VALUATIONS:

Plethico currently trades at standalone EPS of Rs 42.5. Other companies like Elder Pharma, Unichem Labs and Novartis India of similar sizes, but different nature of businesses, trade at similar valuations. Plethico has a conservative revenue and profit target of Rs 1,000 crore and Rs 200 crore, respectively, for the financial year ending December ’09. Considering the company’s estimated consolidated earnings for CY09, Plethico is currently trading at a forward P/E of 6.5. This makes it an attractive pick for investors looking for a mid-cap growth stock in a bearish market.