Stock Review: Bafna Pharmaceuticals

 

The transition from the low-margin tender business to the highmargin branded generics holds promise for Bafna Pharma. Along the way, it has to sort out dividend and valuation issues

 

THE Chennai-based Bafna Pharmaceuticals is a 100-crore drug company manufacturing a range of betalactum and non-betalactum antibiotics. The company secures half of its revenues from exports to Sri Lanka, Africa and the UK. In the domestic market, the company predominantly earns from lowmargin institutional tender business.

   The company has two manufacturing facilities. The old betalactum facility mostly caters to the Sri Lankan market and the domestic institutional one. Its new non-betalactum facility, which is approved by the UK regulator MHRA, undertakes contract manufacturing for European pharmaceutical companies for niche products.

   The company has started introducing branded generics in the Sri Lankan market and also started contract manufacturing business, allowing it to launch products in the non-regulated markets in Africa and the CIS region.

GROWTH STRATEGY:

The company has outlined a multi-pronged approach to drive growth. It intends to strengthen its contract research and manufacturing services (CRAMS) business by expanding to highmargin products and geographies. The company also wants to increase its portfolio of branded generics for promotion in the domestic and non-regulated markets. Towards this end, the company has recently acquired a 40-year-old brand Raricap from Johnson & Johnson. The company estimates to earn a revenue of 50 crore from the iron supplement brand Raricap over the next three years. In a bid to expand its manufacturing capacities, the company also plans to acquire one more manufacturing unit in Chennai.

FINANCIALS:

The company's revenues have grown at a compounded annual growth rate (CAGR) of 39% over the past five fiscals. While profit has grown at a commensurate CAGR of 31%, in actual terms it has gone up from mere 0.8 crore to 2.5 crore over the past five years.

   The company's strategy of shifting from the low margin tender business to the high-margin branded generics business is yet to bear fruit. The company is targeting a revenue of 500 crore by end-FY14. It sees net profit margin to improve to 15% by FY14 from the current level of 3-4%. The new brand acquisition has cost the company 25 crore. The company funded the buy partially by an equity component of Rs 9 crore and the rest via bank loans. The company is also planning to acquire a manufacturing unit. The company already pays a high interest cost of 3 crore and any addition of debt to fund its acquisitions will increase this element of cost in the short-to-medium term.

VALUATIONS:

Bafna Pharma is currently trading at a market cap of 78 crore, much lower than the total revenue of 95 crore (over the past four quarters). Typically, pharmaceutical companies trade at twice and more of its revenues.

   However, due to its very low profits (in the range of Rs 3-4 crore), it is not commanding industry valuations. The company is currently trading at a P/E multiple of 19, which is high valuation for a small-sized firm.

   Moreover, the company has not paid any dividends in the past. High valuations and no dividend provide little incentive for investors to invest in the stock.