Shilpa Medicare API Facility Approved by US and Japan

Shilpa Medicare: API Facility Approved by US and Japan 

Published: 14 April 2016

We had written a series of reports on Shilpa Medicare with the first recommendation of buying between Rs. 130 – Rs. 137 (pre-split price 260-275) in January 2014. As on 13Apr2016, Shilpa is trading at a price of Rs. 517, indicating a return of 287% (3.87 times) so far.  Past reports for your reference: Shilpa Medicare: Riding on Cancer Medicines Multiple engines of growth for Shilpa Medicare Shilpa Medicare: 3.5x Already; Focus Year FY17 Over the last few months there are certain events that have increased the strength of Shilpa Medicare's story. Here is the summary of the same.  Intention of raising funds via QIP: The company is planning to raise fresh funds to plan for expansion of facilities. We like Shilpa Medicare's strategy to avoid expansion with debt as the it faces high regulatory risk which can delay project approvals leading to cost over-runs if expanded by debt. As per our estimate, the company will raise around Rs. 200 crores at a decent premium to current price.  Receipt of USFDA approval for two API units in Raichur: The USFDA approvals will help the company to start its API supply to the US market. As of now Shilpa Medicare does not have any revenues coming from the US market.   Receipt of Japanese FDA approval for two API units in Raichur: Shilpa also received Japanese FDA approval for its API unit in Raichur. Shilpa is one of the few Indian companies to receive the Japanese FDA approval. Shilpa has build strong relationship with certain formulators in Japan over the last decade by getting its processes and plants audited by clients. This approval should help the company to monetize opportunities in Japan over a longer period.  Completion of construction of Raichem (ICE JV): Currently, very large portion of Shilpa's revenue come from a single client based in Italy (ICE). Due to the long term successful relationship of Shilpa and ICE, they formed a JV and constructed plant solely to supply products to serve ICE's requirement. The construction work of this facility is over and exhibit batches (sample batches) are being prepared (6-8 months procedure).  What lies ahead?  Increase in API revenues: With the two major approvals for its API facilities, the immediate outcome should be a corresponding increase in API revenues along with improvement in margins. This will add to the visibility of growth in sales and earnings.  Awaiting USFDA approval for Formulation facility in Jadcherla: Shilpa has build a formulation plant in Jadcherla at a cost of Rs. 200 crores. The formulation plant has been audited by FDA's of various countries including the US FDA. Based upon the feedback of these agencies, Shilpa has corrected / improved the process and is waiting further feedback from some of these agencies. As of now, formulation facility is not contributing to any major revenues except for the exhibit batches. Once the plant receives major approvals, it should mark entry of Shilpa from being a API player to a formulation player. We expect that this Jadcherla formulation unit should start contributing significantly by FY18 if this facility gets regulatory clearances over next 6-12 months.  We continue to remain positive about Shilpa Medicare's business and maintain a hold on the stock at CMP of Rs. 517 (post split price).    

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