Herbal boost

PENNY WISE

A focus on herbal healthcare has helped Plethico Pharmaceuticals expand quickly and maintain high margins.

Mumbai-based Plethico Pharmaceuticals, a manufacturer of over-the-counter healthcare products, is expanding its presence in the overseas markets to broadbase its revenue base.

The company is also planning to expand its manufacturing facilities to cater to increasing demand for its products in the herbal, consumer healthcare and nutraceuticals, pharmaceutical formulations, and hospital consumables space.

Unlike generics, herbal products and nutraceuticals or dietery supplements do not have to go through the lengthy product and patent approval processes.

Plethico bought an American company, Natrol, specialising in herbal care products, in January this year to expand its presence in the regulated markets and is in the process of putting up a manufacturing plant in Dubai.

Natrol acquisition
Plethico hitherto had a presence in the less regulated markets of CIS and Africa. To capture a share of the regulated markets, the company acquired US-based Natrol for $80.7 million.

Natrol is a manufacturer of branded nutritional products and its acquisition will give the company an immediate presence not only in the US but also in the UK and Hong Kong.

Post the acquisition, the US market is likely to contribute 45 per cent to consolidated revenues. The company ended the 15-month period in December 2007 with revenues of Rs 555 crore.

Plethico is planning to manufacture Natrol brands in India and sell them in the country and other semi-regulated markets along with the US markets. This will help to improve its margins going forward.

That apart, the company plans to market its own key brands of Travisil (cough and cold) and Mountain Herbz (lifestyle ailment medication) in the US over the next few months using the already established distribution channel of Natrol.

Going herbal
The World Health Organisation estimates that the world market for herbal products would be around $60 billion and growing at 7 per cent annually.

Europe accounts for the largest chunk at $23 billion, while the North American market is estimated at $13.2 billion. Global nutraceuticals market is also projected to witness healthy growth and expected to cross $187 billion in sales by 2010.

The United States, Europe and Japan dominate the global market, with their combined share estimated at 86 per cent in 2007. The growth in world markets and the acquisition of Natrol is likely to push Plethico's share of the herbal and nutraceuticals segment in the total revenues to over 70 per cent in FY09 and FY10 from 50 per cent in FY07.

The upcoming Dubai plant will also help improve Plethico's reach further. Plethico has 45 products in the herbals and nutraceuticals segment with its top brand Travisil accounting for 15 per cent of total sales. Regards the Indian nutraceuticals market, it is currently pegged at $40 million, and is likely to touch $270 million in two years.

Overseas expansion
Plethico is setting up a Rs 100 crore production facility in Dubai to manufacture medical lozenges and new drug delivery system (tablet/capsules), confectionary and allied products.

The decision to set up a unit was taken to meet high growth in demand in the revenue earning segments of medicated lozenges and confectionary, where Plethico was facing capacity crunch.

The company believes that the new unit will be in proximity to markets of Commonwealth of Independent States (CIS), Europe, South Asia and Africa and will be entitled to tax breaks.

The plant is expected to be operational by CY 2010. While the company is focused on its herbals and nutraceuticals business, it also carries out contract manufacturing, wherein it supplies bulk drugs and intermediates to Indian manufacturers.

Till now, the company focused on domestic markets to sell its products and the large capacities available forced it to utilise the same and sell bulk drugs. But, after the foothold it has got in developed markets, the company is likely to use these facilities for its core business. 
 

HEALTHY NUMBERS
Rs crore	CY07*	CY08	CY09
Net Sales	555.43	592.72	740.90
Operating profit	162.80	163.00	203.75
Net profit	141.87	142.25	166.70
EPS (Rs)	41.65	41.77	48.94
P/E (x)	-	9.19	7.85
*15 month period ended December 2007; hence growth in CY08 looks muted

Investment rationale
The company's performance in December quarter has been robust. Sales at Rs 122 crore for the quarter ended December were up 50 per cent, largely due to increased contributions from South East Asia, West Asia and Latin America, which accounted for 28 per cent of revenues.

Operating profit margins have been hovering at around 25-30 per cent over the last two years.

Going ahead, the company believes that it can easily sustain a growth rate of 20 per cent due to its presence in high growth markets. At Rs 384, the stock trades at a P/E of 9 times its estimated CY08 earnings of Rs 42.

Given the growth prospects in new markets and the benefits from the Natrol acquisition, the stock should generate about 40 per cent returns by the end of 2009.