Smruthi Organics Ltd. – BSE Code: 590046

We have been tracking this company for few years and we like the way the company has performed in the last 2-3 years and yet remains ignored and undervalued. We feel it’s a good pharma company to make a part of portfolio.

Smruthi Organics is a small sized pharma company based out of Solapur, engaged in manufacturing of APIs, drug intermediates, specialty chemicals & contract manufacturing.

The company has undergone a major change since about year 2005-06. At that time, the company had started upgrading its manufacturing facilities to make them USFDA, European GMP compliant. It received USFDA approval in 2007. Since 2005 the company has been growing continuously and has grown from a turnover of just 32 Cr to 121 Cr last year. This year they should cross 150 Cr turnover.

Smruthi is a leader in the following APIs and owns the following 4 Drug Master Files (DMF) – Norfloxacin, Metformin HCL, Amlodipine Besilate & Carbidopa. The company is expanding its product portfolio by filling more DMFs in both US & EU.

Having USFDA & European GMP approved facilities is a big advantage and to capitalize the true potential, the company has started focusing on Contract Manufacturing space and works closely with large pharma companies like Merck, Watson, Sandoz etc. The company has 7 products as of now and would be adding new products every year to make Contract Manufacturing a constant earning stream.

Attractive valuations at CMP of about 135:

  • The co has been growing at a CAGR of about 28% for last 5 years. Turnover has grown from 45 Cr in 2006 to 121 Cr last year. This year again the company is expected to grow about 27-28% and cross 150 Cr turnover.
  • Stock is trading at a PE multiple of less than 6 based on 12 month earnings till now.
  • Book Value as on 31st December 2010: Rs.65.60.
  • Promoter holding has increased from 56% last year to 65%+ as of Dec, 2010.
  • Market Capitalization of the company is about 50 Crore vs expected turnover of about 150 Crore this year. Usually pharma companies trade at much higher valuations.

Company Financials:

Company Website | Company Annual Report @ Dalal-Street Reporter

  • Anonymous

    Hi Ayush,

    Forgive me for asking an question unrelated to this post here. However as there is no email-id provided I am posting here. Please feel free to remove or move it as necessary.

    I came across the company Camson Biotech today (http://www.moneycontrol.com/news/market-outlook/multi-bagger-ideas-3-stocks-that-can-multiply-your-money_534329.html) and started to read the company’s last year annual report- http://www.camsonbiotechnologies.com/pdf/camson_AR_09_10.pdf

    When I looked at Auditor’s report and the Annexure to the same (pages 36 and 37), I was not sure whether the auditor’s opinion has material impact to the company’s prospects. Would it be possible to have a look into the same and provide your views (especially the italicized text) as this company seems to be potential investment opportunity? If you want to research idea and publish a detailed idea, that would be awesome.

    Thanks in advance.

    • Hi Madhav,

      Currently Ayush bhai is out of town and will respond to the queries when he returns (on 12th April).

      Regards,
      Pratyush

      • Anonymous

        Thanks Pratyush.

    • Ayush

      Hi Madhav,

      We haven’t been tracking this stock closely…but had heard few negatives about the quality of the earnings of the company. Similarly the way negative comments (comments in italics) have been given by the auditors, it should be a concern for the investors of this co.

      Especially the following comments from the auditor reports:

      1. “Supporting documents relating to Rs 2,506 lakhs of expenses incurred during the year is misplaced / lost in transit”

      2. Auditor report point no 2 (c)

      3. Auditor report point no 7

      4. Auditor report point no 9 (a)

      Comments in italics are usually the negative comments of the auditors.

      Regards,

      • Anonymous

        Hi Ayush,

        Thanks for clarifying and confirming my doubts about the auditors report. I am happy to bounce it off you guys as qualified CA’s. In fact, if you would start a paid research service I will be happy to be your client… no kidding.

        Regards.

  • Ayush,

    Couple of questions and observations…

    1. Earnings (both quarterly and annual) seem to be lumpy. For a API producer in the pharma space, why should that be the case?

    2. The valuation seems to be cheap for a long time. i.e. it has been undervalued for a while now. What is the trigger that you see for this stock for it to be re-rated now?

    3. And finally, a more generic question on the sector itself. How is the recent pharma mergers (I believe there would be more consolidation in the future) affect these supplier companies/

    Regards,
    Abhishek
    http://valueinvstr.blogspot.com

    • Ayush

      Hi Abhishek,

      Yes, earnings were much lumpy earlier…but things seem to have stabilized in last few qtrs.

      I think the stock has remained undervalued caus of lack of awareness about the co and the stock being illiquid. But with the co attaining a size now and constant stream of revenues coming in…the things could change. The co is now a 150 Cr turnover co…and now big enough for investors to participate.

      I think it should be positive for the suppliers as if they are indeed good, then they would get more business at a bigger scale.

      Overall what I like is – given the current performance and valuations, there is a decent margin of safety. Now if the co continues to do well and grow, this stock can give very good returns down few years.

      Views Invited.

      Regards,

  • Vishalkejriwal26

    Hi Ayush,

    How promoter has increased their holding more than 9% in single Q, I think there is threshold value of 5% in a year.

    Regards,
    Vishal

    • Ayush

      Hi Vishal,

      Yes, I had also noticed the same. No idea.

      Regards,

      • Vishalkejriwal26

        ayush,

        I didn’t understand how this is possible,may be promoter is showing fake report.

        • Ayush

          Hi Vishal,

          I don’t think the shareholding pattern can be fake.

          If one analysis the shareholding pattern, some of the increase could be due to re-classification of persons as promoters. This happens in many small cos and it is not wrong.

          Regards,

        • Vishalkejriwal26

          ayush,

          Thanks for clarification.

          Regards,
          Vishal

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