Soft Gel Capsules to lead growth…BUY Marksans Pharma Target Rs 132/-

Marksans Pharma (MPL) is a mid-sized pharma player with a market cap of ~RS 4363 cr with a business model which is poised for good growth in the soft gel capsules (SGC) space over the next couple of years.

 

99% of their revenues come from regulated markets overseas. UK/Europe and Australia are their main markets. With the help of their subsidiaries Bells & Sons and Relonchem in UK/Europe and Nova Pharmaceuticals in Australia the company derives around 49% of their revenues.

 

Their facility in Goa has US FDA approval and approvals from the requisite authorities in UK and Australia.

 

Investment Rationale

 

The big business opportunity for MPL is in the SGG space. There is an addressable market of Rs 143bn in the US in this niche market. In the SGC space competition is limited and hence price erosion is lesser than what we see in the rest of the generics space of up to 80-90%. MPL has 8 ANDA approvals in the US including one SGC and has reported a strong 80% yoy growth in US revenues in FY15. It has 11 pending ANDA approvals of which 10 are for SGC. As and when any of these approvals come through it creates a good revenue growth story for MPL.

 

Their European business which is a mixture of OTC and generics will continue to have a good sustainable growth over the next couple of years, this will be driven by new client adds, established front end and product launches. Their subsidiaries Bells& Sons and Relonchem in UK and Nova Pharmaceuticals will show margin expansion and grow at a steady pace.

 

MPL’s recent acquisition in the US is expected to provide a front end in quarters to come. MPL acquired 100% in Time-Cap Labs (TCL) for ~Rs 1.8bn, valuing TCL at 0.9 X revenue, 7X EBITDA. TCL is a debt free company and MPL used its QIP proceeds and internal accruals for the same. The deal is EPS accretive; TCL that is a generic OTC company will help MPL market its products in the US.

 

Going forward US SGC business is what I expect to be the growth driver. As MPL develops its SGC portfolio and also expands its front end in the US market revenue contribution from here will scale up significantly. Europe could be another expanding market in the SGC space. Its current business in across generics, OTC products will form a good base from which the company will continue to build.

 

Envisaging a good Revenue and profitability growth over the next two years and an FY17E EPS of Rs 6 the stock can by bought with a target of Rs 132/-

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