The pharmaceutical industry in India is growing at 8.6% annually. Globally, herbals product market is valued at about $64 billion. The largest market for herbal products is the European Union. On the other hand, India’s pharmaceutical exports have increased at a CAGR of 22.9% during the period FY1994-2006.

This growth is sustainable looking at the competitiveness in labour cost and vast talent pool available in India. In addition to this, majority of drugs are going off patent and that gives India a good opportunity to take exploit the advantage. And considering such favourable situations emerging, companies like Plethico Pharmaceutical stand a good chance to carve a niche for themselves.

Business

Plethico Pharmaceutical is an Indore-based medium-sized company, which mainly caters to the export market. Its products are mainly herbal, nutraceuticals based. Herbal products are made from natural herbs. It has no side effects in comparison to the allopathic segment. This inherent benefit will be the biggest growth driver of the herbal segment.

Last year, the company raised funds through IPO for acquisition, expansion and setting up R&D facility which is in the final stages of implementation. It is scouting for acquiring an herbal-based company in Germany.

As European Union is the largest market for herbal products the acquisition will enable the company to increase its presence and acquire share at a faster rate. Plethico is planning to acquire minority stake in retail pharmacy chain based in Common Wealth Independent States (CIS). This would enable it to reduce the dependence on credit-based to cash-based segment (retail pharmacy).

Growth driversM

Plethico’s majority of the sales come from cough and cold segment, which are over the counter (OTC) products. It has internationally successful brand ‘travisil’ in its portfolio, used for cough problems. It also has products in food supplements and a niche product for sports nutrition. Its allopathic segment contributes a small chunk. The company’s exports contribute the maximum at 67% of the total revenues. The exports are mainly in semi-regulated or less regulated markets of CIS, Africa, South East Asian countries, Gulf co-operations council (GCC), Latin American Countries (LAC).

Currently, Plethico’s major presence in terms of revenues is in CIS countries followed by Africa. As far as the Indian market is concerned, 81% of the domestic revenue is generated through contract and toll manufacturing.

However, it wants to defocus the domestic market and increase its presence in South East Asian countries, Gulf co-operations council (GCC) and Latin American Countries (LAC). In the last financial year ended September, its actual sales in these countries exceeded the targeted ones.

These markets contributed 28% of the total exports sales in FY2005-06. The company has taken a plot of land for organic farming. This will help to cultivate critical herbs for captive consumption and will bring uniformity in the herbal-based products.

Financials

The company’s business is seasonal in nature as cough and cold products are sold in the winter season. Due to this the results show quarter-on-quarter growth. The June 2007 quarter sales and profits were Rs 122.50 crore and Rs 32.66 crore respectively. It has shown a growth of 51.16% and 40.65% in sales and profits respectively over the corresponding 2006 quarter. Its nine-month sales, operating profit and net profit were Rs 311.76 crore, Rs 90.31 crore and Rs 78.12 crore respectively.

It also has very strong and healthy operating and net profit margins at 29% and 25% respectively. One of the reasons for high profit margin is less tax burden. The company’s net tax rate comes at 2.36% in the last nine months results. This results in huge savings and the company can plough it back into research and development activities.

From the valuation point the twelve-month annualised fully diluted earning per share is Rs 30.57. Considering the current market price the P/E is at 12.70(x). In FY2005-06 the company had acquired six companies in CIS countries. Now it will partly hive off certain percentage of the equity stake in all the six companies at 40% premium.

?The author does not hold any shares in the company