FDC Ltd (Buy@Rs.81, Target Rs.120) - LKP BYTES

The story so far.......

Mumbai based FDC is today a Rs7bn company, known for its 'Electral' range of Oral Rehydration Salts - ORS and Ophthalmic formulations.

With 7 manufacturing facilities (3 in Goa and 1 each in Roha, Waluj, Nashik and Baddi) and with Goa and Waluj facilities approved by the US FDA & UK MHRA, we believe that FDC's international operations which presently account for just 12% of its revenues present lucrative out-licencing opportunities in the Ophthalmic space.

What went wrong in FY'12?........

The company had a flat FY'12 with hardly any growth in top-line or bottom-line even though the domestic pharmaceutical industry grew at a healthy rate of 16%. Higher attrition of field employees coupled with higher salaries impacted profits

The story ahead......

Unlike many of its peers in the industry FDC's working capital or cash conversion cycle is virtually zero in number of days and it enjoys a lucrative 20% PBT margin in its core pharmaceutical business without considering the 10% return it earns on treasury operations from its cash chest of Rs2.5bn.

Considering the attrition levels in the industry and the fact that new medical representatives will have a lead time in turning productive, we would like to bet on this company although its domestic operations at Rs6bn is still a miniscule 1% of the total pharmaceutical market in India.

Trading at twice price to book and twice market capitalization to revenues FDC at 10xFY'13E earnings is a virtually debt free company paying 30% of its post tax profit as dividend and is regularly undertaking share buy-backs to enhance value for its stakeholders.

We believe markets are ignoring the predictability of free cashflows with a superior margin profile which is virtually in line with FMCG companies. We recommend a Buy on FDC with a one year price target of Rs120.

Source : Equity Bulls

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