Shilpa Medicare

 

New Investors Should Be Cautious As Current Valuations Discount Earnings Upside

 

THE bulls have taken fancy to the Shilpa Medicare — a small-sized pharma company. Its price made a record intra-day high of Rs 362.50 on Tuesday after having risen by more than eight times over the past one year. News of financial institutions buying a small stake in the company along with a dilution by the promoters has fuelled the recent rally in the stock.

   Besides the news-driven buying interest, the re-rating witnessed by the stock has been sparked due to the strong growth delivered by the company over the past one year. Shilpa Medicare has seen a steady rise in its consolidated revenues and improvement in its operating profit margin over the past four quarters.

   The company that earns 75% of its revenues from exports manufactures active pharmaceutical ingredients (API) products in the oncology segment. While its product portfolio is doing well, the company is also building its pipeline of oncology products that are slated for expiry. The company is also ramping up its contract research and manufacturing services (CRAMS).

   Shilpa Medicare is entering into a joint venture agreement with an Italian company to set-up manufacturing facilities for its products.

   The company is also coming up with an export-oriented undertaking for manufacture of oncology formulations and APIs. Once this unit becomes operational, it is further likely to increase the company's business.

   At a market cap of nearly Rs 750 crore, Shilpa Medicare is valued at more than three times its consolidated annual revenues. The company's stock is trading at a consolidated price-to-earnings (P/E) multiple of 23. These valuations appear to be too stretched for a small-sized pharma company.

   Though the company may have promising growth prospects, new investors who are lured by the recent run up in the stock price must be wary of entering the stock at the current high price levels. This is because most of the visible earnings upside seems to have been factored into the current valuations.