>PLETHICO PHARMACEUTICALS (CRISIL)

Plethico Pharmaceuticals (Plethico) is engaged in the manufacturing of herbal formulations, nutraceuticals and allopathic products. We assign Plethico a fundamental grade of 3/5, indicating that its fundamentals are ‘good’ relative to other listed securities. We assign a valuation grade of 4/5, indicating that the current market price of the stock has ‘potential upside’ from the current levels. We have arrived at a one-year fair value of Rs 458 per share.

Global nutraceutical market is emerging from the nascent stage
We expect the global nutraceutical market to grow at a CAGR of 9% during CY08-13 on the back of an increase in awareness of lifestyle-related health issues and a rise in disposable incomes. We expect Plethico, with around 90% exports, to grow at a faster rate due to increased penetration into new geographies.

Natrol acquisition has strategically enhanced Plethico’s value.
We believe that this acquisition has provided the following benefits to Plethico:

i) It has strengthened Plethico’s product mix and enabled its foray into the US and the UK.

ii) Successful leveraging of Natrol’s products in the non-US markets: In CY09, Plethico introduced Natrol’s products to the non-US markets, pushing up revenues from $ 101 mn to $ 114 mn.

iii) Cross-selling of products: As Plethico and Natrol cater to different geographies, Plethico now plans to cross-sell products to strengthen its position in those markets. It also plans to enter new territories.

CRISIL Equities is of the opinion that the management has successfully leveraged on the Natrol acquisition so far.

Restructuring of manufacturing operations to boost profitability
Plethico has incurred a capex of Rs 2 bn towards setting up a manufacturing facility near Dubai, UAE entitling the company for a 50-year tax holiday. With the commercialisation of the plant in August 2010, Plethico plans to re-organise its manufacturing operations. It will significantly reduce the cycle time, thus saving on costs and taxes. We expect the benefits of the restructuring exercise to accrue by CY12 and project an increase in EBITDA margins from 15.8% in CY11 to 19.2% in CY12.

We expect Plethico’s revenues to grow at a two-year CAGR of 26% from CY09 to CY11. We foresee a growth of 19% in PAT in CY10 and 6.5% in CY11. Due to the Rs 2 bn capex and restructuring of operations, we expect RoE to decline from 23% in CY09 to 22% in CY10 and further to 19% in CY11 before improving to 23% in CY12.

Key risks
High exposure to international markets adds to the risks involved in the operations. The behaviour of the receivables cycle and timely commissioning of the new plant are key monitorables.

Valuation: Potential upside from the current levels
Plethico has been trading at a five-year average PE multiple of 7x. We have applied a fiveyear
historical PE average of 7x to its CY10 EPS of Rs 65.5 and arrived at a one-year fair
value of Rs 458. Our discounted cash flow valuation also supports the PE-based valuation.

To read the full report: PLETHICO PHARMACEUTICALS