Poly Medicure Ltd. - Initiating Coverage 25-11-2013

Retail Research Medical Devices & Disposables

Initiating Coverage 25 November, 2013

Poly Medicure ltd. (Polymed), a leader in medical disposables in India.Established in the year 1995, with a view to mark a presence inmedical devices and disposables industry. The Company is engagedin manufacturing and marketing of medical disposables, products likeIntravenous (IV) Cannula, Blood Transfusion (BT) set and Insulinsyringes are the top grosser. Polymed has manufacturing facilities atFaridabad (Unit II - USFDA approved) and Haridwar in India and asubsidiary in China. The Company fetches around 70% of its revenuefrom exports and 30% from domestic markets; Europe contributes 40%of the total export business. We initiate coverage on Poly MedicureLtd. with Buy recommendation for the target price of Rs.431, indicating27% upside.

Leadership in organized medical disposable market: Polymedcommands leadership position in an organized medical disposablemarket in India, producing more than 90 products. It has gainedexpertise in manufacturing variety of products like IV cannula, SafetyIV cannula and insulin syringe. It is leading exporter and supplier ofIV Cannulae, Safety IV Cannuale, IV infusion sets and blood bags toover 80 countries across the world.

Easing off capacity constraint by setting up new facility atJaipur: To ease off capacity constraints at Faridabad (Unit II) plant,the Company is in the process of setting up a new plant at Jaipur inMahindra SEZ which would get commercialized by the end ofQ4FY14. The total estimated cost for setting up this plant would bearound Rs.38crs out of which Rs.21crs would be raised via term loanand Rs.17crs via internal accruals.

Export business is expected to grow at a CAGR of 16% duringFY13-FY15e: Exports contributes around 70% (FY13) of its totalturnover, which comes to Rs.185crs. Export market is divided into twoparts - sales to OEMs and sales via distributors. Export revenueshave grown at a CAGR of 18.8% during FY11-FY13 and we believeit to grow at a CAGR of 16% between FY13-FY15e.

Valuation and Recommendation: Recently, the stock has run upsharply on the back of robust Q2FY14 performance, we foreseesimilar quarterly performance in coming quarters. At the currentmarket price of Rs.340 the stock is trading at a P/E of 20x and 14xof its FY14e and FY15e earnings, respectively. The value of Polymed'sbusiness is pegged at Rs431 per share by discounting FY15e EPSof Rs24 by 18x.

Year Sales EBITDA PBT PAT EPS DPS BVPS(Rs) (Rs) (Rs)

FY12 217.0 46.9 28.8 19.5 17.7 3.0 84.9

FY13 259.8 51.7 33.1 24.2 22.0 2.0 102.3

FY14e 306.5 72.6 48.4 37.0 16.8 2.0 70.1

FY15e 371.6 93.6 69.4 52.7 23.9 2.0 90.8

FINANCIAL SUMMARY (Rs. in Crs.)

ANKIT GOR - Research Analyst

Regd. Office: SBICAP Securities Limited, 191, Maker Towers 'F', Cuffe Parade, Mumbai 400 005

For a list of our branches refer to our website: www.sbicapsec.com

Particulars FY12 FY13 FY14e FY15e

PE 19.2 15.4 20.2 14.2

P/BV 4.0 3.3 4.8 3.7

EV/EBIDTA 8.6 8.0 11.1 8.5

EV/Sales 1.9 1.6 2.6 2.1

Mcap/sales 1.7 1.4 2.4 2.0

Price/sales 1.5 1.3 1.1 0.9

PEG -1.9 0.6 -0.9 0.3

Div. Yield (%) 0.9 0.6 0.6 0.6

STOCK DATA

BSE Code 531768

NSE Code POLYMED

Bloomberg Code PLM IN

52 Week High / Low (Rs.) 389 / 190

Face Value (Rs.) 10

Diluted Number of Shares (Cr.) 2.2

Market Cap. (Rs Cr.) 748.2

Avg. Yearly Volume 4,582

SHAREHOLDING PATTERN (%)

FINANCIAL RATIOS (x)

RELATIVE TO SENSEX

RETURNS STATISTICS (%)

Particulars Sept-13 Jun-13 Mar-13 Dec-12

Promoters 48.7 48.7 48.7 48.7

FII's 0.0 0.0 0.0 0.0

Other Institutions 0.0 0.0 0.0 0.0

Public & Others 51.3 51.3 51.3 51.3

Total 100.0 100.0 100.0 100.0

3 M 6 M 12 M

Sensex 8.9 0.9 9.2

Polymed 38.5 33.6 65.1

Poly Medicure Ltd. BUY

Current Price Rs 340

Target Price Rs 431

Upside / (Downside) % 27

50

75

100

125

150

175

Nov-12 Feb-13 May-13 Aug-13 Nov-13

Polymed Sensex

Poly Medicure Ltd. Medical Devices & Disposables

2 • November 25, 2013 SBICAP Securities Limited

Leadership in organized medical disposable market

Polymed commands leadership position in an organized medical disposable

market in India, producing more than 90 products. It has gained expertise

in manufacturing variety of products like IV cannula, Safety IV cannula and

insulin syringe. It is the leading exporter and supplier of IV Cannulae,

Safety IV Cannuale, IV infusion sets and blood bags to over 80 countries

across the world. Although the domestic market is very competitive due to

presence of unorganized and established players like Ramsons and Global

Surgimed Industries, the Company has been able to increase its domestic

presence in 2013 through innovation, product up-gradation and

strengthening of distribution channel.

Top five products

Product Therapy Market share Avg. pricerank (Rs.)

IV cannula Infusion therapy 1 8

IV safe Infusion therapy 3 20

Blood Bag Blood mgmt. and collection system 3 65

BT Set Blood mgmt. and collection system 4 35

Safety IV cannula Infusion therapy 3 20

Source: SSL Research, Company

Except safety IV cannula, other products yield average margin of 15-20%.Safety IV cannula gives 30-35% margins. Polymed is more focusing onrapidly expanding infusion therapeutic area by setting up new facility whichwill chiefly cater to export markets.

Higher quest for scale - focus is on domestic markets

Over the years, overseas markets are the Company's major revenuedrivers. Currently export business is contributing 70% of the total revenueas compared to 75% in FY11 and the management is confident of bringthis to 65% by FY15. The Company wants to have bigger pie of thegrowing Indian market of medical devices and disposables. Polymed is inthe process of scaling activities domestically by increasing footprints acrossIndia via expansion of distribution network to reach more number ofhospitals and doctors.

REVENUE COMPOSITION (%)


75 73 70 68 65

25 27 30 32 35

20%

40%

60%

80%

100%

FY11 FY12 FY13 FY14e FY15e

Export Domestic


SBICAP Securities Limited November 25, 2013 • 3

Domestically it operates in two ways (1) by filling government tenders and

(2) distribution to private hospitals and doctors. Presently, volume driven

tendering business constitutes 53% of the total domestic business and the

rest is via private hospitals and doctors. The Company has plans to focus

on domestic market and which can be seen from trends in revenue

contribution where the balance has been shifting towards the domestic

business. The prime reason for this is the higher margin which the

Company gets from domestic sales (~20-25%) as compared to exports

(~15-20%). Domestic business has grown at a CAGR of 35% between

FY11-FY13 and we expect it to grow at a CAGR of 29% between FY13-

FY15e.

Easing off capacity constraint by setting up new facility at Jaipur

The Company has a state of art manufacturing facilities at Faridabad (Unit

I and Unit II) and Haridwar, cumulative capacity of 500 million pieces/

annum of healthcare disposables. About 70% of the total capacity is

allocated to Faridabad (Unit II - USFDA approved) plant, which is primarily

producing export oriented IV cannulas and Safety Cannulas and running

at around 105% of the total capacity with no further scope for an

expansion.

To ease off capacity constraints at Faridabad (Unit II) plant, the Company

is in the process of setting up a new plant at Jaipur in Mahindra SEZ which

would get commercialized by the end of Q4FY14. The total estimated cost

for setting up this plant would be around Rs.38crs out of which Rs.21crs

would be raised via term loan and Rs.17crs via internal accruals. This

capacity would mainly add to cannula production and products from this

plant would be exported. It has planned to increase capacity gradually;

initially it will produce less than 100 million units of cannulas. This

additional capacity would help the Company to cater increased demand

from overseas markets and would add incremental revenues of around

Rs.18crs in FY15 and about Rs.30crs. in FY16.

Plants, products and capacity

Faridabad Jaipur (commercialized

Unit I Unit II Haridwar by Q4FY14)

Products manufactured IV cannulas IV cannulas Cannulas IV cannulas

Urine bags Safety Cannula IV sets IV sets

Catheters Others

Blood Bags

Others

Capacity (million pieces/annum) 125 350 25Operations yet to start

Capacity Utilization (%) 95 105 95


DOMESTIC BUSINESS BREAK-UP


47%53%

Tendering business

Dist. to private hospitals & doctors



25%

40%20%

15%

Europe

Asia

Africa

RoW

Automation to bring in quality and efficiency - will lead to margin

expansion

The Company has initiated an automation process in August 2012 and

expected to get complete by the end of this financial year. Previously all

plants used to operate on labour intensive assembly line. Recently supply

of migrant labours from regions like Bihar, UP and MP has gone down, led

to labour shortage. An automation process aims at reducing dependency

on labour and improves quality and efficiency.

The Company has recently invested about Rs.50-60crs in automation and

should cater Polymed for next 10-15 years. Polymed is driven by experienced

technocrats, they have and they would ensure that a quality automated

process is installed which would help the company to reduce labor cost,

obstacles in production due to labor shortage, quality improvement and

assurance and reduction of wastage. All of these would result in higher

quality.

A completion of an automation process would enable it to reduce time

taken to convert raw material (plastic granules) to finished goods (like

Cannula and blood bags). Current conversation rate is around 7-10 days,

as it follows made-to-order production style; we expect it to come down to

5-8 days post fully automation. This will incrementally add around 80 bps

to its EBITDA margin.

Export business is expected to grow at a CAGR of 16%

during FY13-FY15e

Poly Medicure Ltd. has a presence four countries namely India, China, US

and Egypt through which it caters to more than 90 countries world over.

Around 70% of its total revenues derive from international markets, of

which Europe is at top with 40% of its total export revenues, followed by

Asia (25%), Africa (15%) and remaining from RoW.

EXPORT REVENUES BREAK-UP (GEOGRAPHY-WISE)




45

65

79

96

120

20

40

60

80

100

120

140

2011 2012 2013 2014E 2015E

The Company has JV in Egypt - Ultra for Medical Products. The Companyhas achieved top line of Rs.40crs. in CY12. Poly Medicure (Laiyang) Co.Ltd, Chinese subsidiary which has started commercial production duringFY10 with a turnover of Rs.1cr and in FY13 it has achieved a turnover ofRs.10crs. It had also acquired a subsidiary in USA, US Safety Syringes Co.in 2007, till now no operational activities have been undertaken here.Going further, Polymed is planning to close down this unit and liquidatewhich would fetch them around Rs.80 lacs (investment X 3x), amount willreflect in FY15.

Exports contributes around 70% (FY13) of its total turnover, which comesto Rs.185crs. Export market is further divided into two parts - sales toOEMs and sales via distributors. In OEM segment it has about 15 clients,contributes around Rs.56crs (30% of its total export revenues) andremaining 70% export business comes from distributors across the world.New plant at Jaipur will definitely give impetus to export revenues. Exportrevenues have grown at a CAGR of 18.8% during FY11-FY13 and webelieve it to grow at a CAGR of 16% between FY13-FY15e.

Indian healthcare industry is poised to grow

Despite the second most populous country in the world, healthcareexpenditure is very meager in India as compared to other countries. As apercentage of GDP, US spends highest on healthcare (17%) followed byEuropean countries (ranging between 7-9%), while India spends only 4%(represents untapped potential)

Indian government is also increasing budgeted allocation YoY, in thebudget 2013-14 it has allocated Rs.373.3 billion (8% increased YoY).Being at a nascent stage Indian healthcare industry is poised to grow, itis aspiring to touch USD120 billion mark by 2015 and active participantswill get benefit of this buoyancy.

Hospital beds per thousand people in India are 0.7 (Source: World Bank)which is not at all comparable to other countries. Increased standard ofliving, increasing per capita income and demand for better medicalfacilities will require this number to at least match up the level of BRICcountries. Government plan is to targeting 2 hospital beds per thousandpeople in next 10 years, this will swell up the demand for medical devicesand disposables, going ahead.

EXPORT REVENUES (Rs. In Crore)


INDIAN HEALTHCARE INDUSTRY SIZE (BN $)

Source: WHO & World Bank

HEALTHCARE SPEND AS % OF GDP

Source: OECD

CAGR 20%

HOSPITAL BED PER 1000 POPULATION

Source: WHO & World Bank

131

160

185

212

246

-

50

100

150

200

250

300

FY11 FY12 FY13 FY14e FY15e

3.1

3.9

2.4

3.0

0.7

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

USA UK Brazil China India

18

911 12

9 10

4

2

6

10

14

18

22

USA U.K

Ger

man

y

Fran

ce

Aus

tral

ia

Japa

n

Indi

a



Indian medical device and disposable industry is set to grow -

$7.8 billion by 2016

Indian medical device and disposable industry is currently valued at $4.4

billion and is expected to reach $7.8 billion by 2016 moving at a speed of

15.5% CAGR, being a market leader in the disposable industry, Polymed

is set capture larger pie of this growing market.

Indian medical devices and disposable market can be categorized into

three segments namely, medical equipments which account for 55% of

total Indian medical devices market, medical implants - account for 25%

and medical disposable segment contributes remaining 20%. Around 90%

of the demand for medical equipments and implants is met by imports but

in case of medical disposables more than 70% of the demand is met by

domestic sources. Here strategy of Polymed will yield fruits to focus on

domestic market to capture remaining market share.

MEDICAL DEVICE MARKET BREAKUP

Source: Grant Thornton , Healthcare Pulse, 2013

INDIAN MEDICAL DEVICE INDUSTRY SIZE $ BN

Source: Grant Thornton , Healthcare Pulse, 2013

55%

20%

25%

Medical equipment

medical implants

Medical disposables

3.64.1

4.4

5.8

6.7

7.8

2

3

4

5

6

7

8

2011 2012 2013 2014E 2015E 2016E

CAGR 15.5%



Concerns

Competition from unorganized players

Though Polymed is growing faster, we cannot ignore the presence of

unorganized players. Entry barriers are low, as this industry is not capital

intensive.

Global slowdown could hurt exports

As the company receives majority of its revenues from exports fluctuations

in international economies have a direct impact. Europe and U.S account

for more than 50% of the total company's exports, so any slowdown in

these economies could lead to lower top line as compared our estimates.

Currency risk

The company procures 90% of its raw material from international markets

and hence if rupee depreciates further, could increase the cost of raw

material leading to lower margins although the Company has a natural

hedge due to its exports but it's a partial one.

Small cap

Polymed is a small cap. Before investing into any small cap companies one

has to understand its nature i.e. small caps are tend react more sharply

to market movement.



Valuation and Recommendation

Having notable presence in domestic disposable industry, Polymed is poised to grow. A new facility at Jaipur would

give impetus to its export business. Once an automation process completes at its all plants, we will see better and

timely output with reduction in the wastages, this would also boost EBITDA margin. As the standard living

increases along with the requirement of quality healthcare services, overall demand for branded disposables will

rise, Polymed is well positioned to capture the benefits of growing demand. We expect its top line and bottom line

to grow at a CAGR of 13% and 48% respectively between FY13-FY15e.

Recently, the stock has run up sharply on the back of robust Q2FY14 performance, we foresee similar quarterly

performance in coming quarters. At the current market price of Rs.340 the stock is trading at a P/E of 20x and

14x of its FY14e and FY15e earnings, respectively. The value of Polymed's business is pegged at Rs431 per share

by discounting FY15e EPS of Rs24 by 18x.

Financial Performance

NET PROFIT (Crs.) & MARGINS (%)


NET SALES (Crs.) & GROWTH (%)


ROCE & ROE (%)


EBITDA (Crs.) & MARGINS (%)


50

150

250

350

450

FY09 FY10 FY11 FY12 FY13 FY14e FY15e

5%

10%

15%

20%

25%

30%

Sales in Cr. Growth

5%

10%

15%

20%

25%

30%


ROCE ROE

10

25

40

55

70

85

100


10%

15%

20%

25%

30%EBITDA in Cr. EBITDA Margin (%)

5

15

25

35

45

55


5%

7%

9%

11%

13%

15%PAT in Cr. PAT Margin (%)



Financial Statements

Statement of Profit and Loss Figures in Cr.


Sales 217.0 259.8 306.5 371.6

Other Income 0.6 0.3 0.6 0.8

Total Income 217.6 260.0 307.1 372.4

EBIDTA 46.9 51.7 72.6 93.6

Interest 7.0 5.9 6.5 8.4

Depreciation 11.7 13.0 18.2 16.5

PBT 28.8 33.1 48.4 69.4

Tax 9.6 9.8 12.6 18.4

PAT 19.2 23.3 35.8 51.0


EQUITY & LIABILITIES

Shareholder's Fund 93.5 112.6 154.5 200.0

Capital res. on Consol. 0.0 0.0 0.0 0.0

Minority Interest 0.1 0.0 0.0 0.0

Non-Current Liabilities 27.3 34.4 56.1 40.1

Current Liabilities 60.8 67.6 81.4 97.4

Total 181.7 214.6 292.0 337.6

ASSETS

Fixed Assets 90.0 99.8 144.4 137.3

Non-Current Inv. 2.4 4.2 4.9 7.6

Deferred Tax Assets 0.0 0.0 0.0 0.0

Long-term loans & adv. 7.2 15.0 15.6 19.7

Other non-current assets 1.2 1.0 0.8 0.7

Cash & Cash Equivalents 0.6 0.8 1.3 1.9

Other Current assets 80.2 93.7 125.2 170.4

Total 181.7 214.7 292.0 337.6

Balance Sheet Figures in Cr.

Cash Flow Statement Figures in Cr.


Net Profit before Tax 94.1 146.0 177.8 224.4

Depreciation 11.7 13.0 18.2 16.5

Others 5.8 5.5 3.1 4.0

Optg. Profit before WC Chg. 46.8 51.6 69.8 89.9

Change in Working Capital -8.2 -14.0 -14.2 -37.5

Cash Flow Before Direct Tax 38.6 37.6 55.6 52.5

Others -5.6 1.2 4.1 11.6

Cash generated from opt. 33.0 38.8 59.7 64.1

CF From Investing Activities

Purchase of Fixed Assets -26.9 -30.8 -78.0 -38.0

Others 0.5 0.2 -4.5 -24.3

Net Cash used in Invstg. Act. -26.4 -30.6 -82.5 -62.3

CF from Fin. Activities

Issue of equity shares 0.0 0.0 0.0 0.0

Proceed from Long Borrowing 6.5 -0.7 26.4 16.0

Dividend & tax -3.8 -5.2 -5.2 -5.2

Others -9.1 -2.2 2.0 -12.0

Net Cash flow from Fin. Act. -6.5 -8.0 23.2 -1.1

Inc. / (Dec.) in cash & Cash Eq. 0.1 0.2 0.4 0.6

Cash & Bank Bal. (Opening) 0.5 0.6 0.8 1.3

Cash & Bank Bal. (Closing) 0.6 0.8 1.3 1.9

RatiosParticulars FY12 FY13 FY14e FY15e

Per Share Data

EPS (Rs.) 17.7 22.0 16.8 23.9

CEPS (Rs.) 42.5 46.9 31.7 40.8

Book Value (Rs.) 84.9 102.3 70.1 90.8

Profitability Ratios (%)

Operating margin 21.3 19.6 23.3 24.7

Net profit margin 8.9 9.2 11.9 13.9

ROCE 26.2 24.2 25.1 28.0

ROE 20.8 21.5 24.0 26.4

Other Ratios

PER (x) Basic 19.2 15.4 20.2 14.2

P/BV (x) 4.0 3.3 4.8 3.7

EV/EBIDTA (x) 8.6 8.0 11.1 8.5

EV/Sales (x) 1.9 1.6 2.6 2.1

Mcap/Sales (x) 1.7 1.4 2.4 2.0

Leverage Ratios (x)

Debt/Equity 0.4 0.4 0.4 0.3

Interest coverage 5.1 6.6 8.4 9.2

Source: SSL Research


Tax Burden 0.7 0.7 0.8 0.8

Interest Burden 0.6 0.6 0.7 0.7

EBIT Margin 0.2 0.2 0.2 0.2

Asset Turnover Ratio 2.6 2.8 2.2 2.9

Financial Leverage 0.9 0.8 0.9 0.7

Return On Equity (ROE) 20.8 21.5 24.0 26.4

Du Pont Analysis - ROE



Name Designation

Alpesh Porwal SVP & Head (Retail)Ankit Gor Research AnalystSameer Sawant Trainee Associate

Corporate Office: SBICAP Securities Limited;

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