Apr 19, 2017 06:26 PM IST

ICICI Securities sees 45-55% upside in 'attractively valued' Mangalam Drugs

ICICI Securities has a buy call on the stock with a target price of Rs 225-235.

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ICICI Securities is bullish on Mangalam Drugs, the API supplier for anti-malarial drug manufacturers, saying the stock has potential to show 45-55 percent upside in 12-15 months due to its attractive valuations.

The brokerage house has a buy call on the stock with a target price of Rs 225-235. The share price closed higher by 10 percent at Rs 170 on Wednesday.

Mangalam's APIs are largely supplied to companies, which participate in WHO tenders and are funded by various global agencies like Clinton Foundation, Gates Foundation, The Global Fund, etc. Out of the two facilities that the company owns, one is WHO approved while the other is awaiting WHO approval.

This approach is a changed stance from the earlier model of chemicals + non-tender APIs, ICICI Securities said.

The brokerage house further said post restructuring its business in FY12-13 by de-focusing on the commoditised chemical businesses, Mangalam mostly stays committed to tender based API supplies approved by WHO and funded by global funding agencies. This augurs well for marginal players like Mangalam as it ensures consistent product offtake and firm cash-flow commitment, it feels.

The management has guided for Rs 500 crore revenue by FY19 (more than 30 percent CAGR in FY17-19) mainly on the back of ARV API traction and 10-15 percent volumes growth in anti-malarial APIs.

Even after considering around 15 percent revenue CAGR in FY17-19, the stock is available at an attractive valuation of 8.9x FY18 EPS of Rs 17.6 and 7.3x FY19 EPS of Rs 21.3, the research firm said.

Revenues grew at 18 percent CAGR in FY12-16 to Rs 295 crore led by strong growth in the tender based anti-malarial API segment, which currently accounts for 70-75 percent of total revenues from less than 50 percent earlier.

The company's EBITDA margins have improved around 635 bps to 15.6 percent in FY12-9MFY17 mainly due to a change in product mix, decline in raw material prices and improved operational efficiency. The company expects EBITDA margins to remain around 16-17 percent in the near term. Mangalam also commands strong return ratios (FY16 return on equity & return on capital employed around 26 percent).

Its customer base includes companies like Ajanta, Cipla, Dr Reddy's Labs, Sun, Mylan and Sanofi among others. Besides anti-malarials, the company is looking to target other segments for WHO tenders like ARV, anti-TB, Hepatitis-C, etc. It has recently forayed into the ARV API segment, which currently contributes 3-4 percent to revenues. The management expects contribution from this segment to increase to 30-35 percent in the next two or three years.

Posted by Sunil Shankar Matkar
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