AARTI DRUGS – 556% Return in Year

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Aarti Drugs limited have given return of 556% in a year which is very difficult for a stock to give even it’s lifetime .

If the stock was bought on 23rd March at it’s 52-week low of 421 then return would have been around 640%.

Since, the stock have run up in very short period of time it would be interesting to know what actually fueled the rally and is there any steam left ?

The Company

Aarti Drugs Limited (ADL) was founded in 1984 .

The Company is engaged in the manufacturing of Active Pharmaceutical Ingredients (APIs), Pharma Intermediates and Specialty Chemicals with its wholly-owned subsidiary- Pinnacle Life Science Private Limited

Products under APIs include :-

Ciprofloxacin Hydrochloride, Metronidazole, Metformin HCL, Ketoconazole, Ofloxacin etc.

whereas Specialty Chemicals includes :-

Benzene Sulphonyl Chloride, Methyl Nicotinate etc.

The company has its manufacturing facilities located at Tarapur, Maharashtra and at Sarigam, Gujarat.

ADL exports to 100 countries and have strong presence in antibiotic, anti-diarrheal and anti-inflammatory segments.

Leadership

The company is the leader in most of the products and well diversified clientele .

What Actually fueled the rally ?

When the lock down was announced almost all companies hit there 52-wk low on 23rd March. However after the initial panic sell investors got to the understand which companies are actually going to benefit from change in manufacturing location .

Also, due to increase demand of medicines pharma also got it’s mojo back and become the street favourite.

The major focus was on API’s manufacturers .

However that alone does not boosted the returns of the market the decrease in crude oil prices which is a key ingredient of raw material for API’s also fallen resulting in low cost of material consumed.

Recently rally in Smallcap index has also fueled the rally in most of small caps.

Following Events triggered the rise in price of ADL.

Increase Profitability

Due to decrease in raw material cost by 12% improved the OPM and hence the profit was increased.

However, the company was able to quadruple it’s profit from Jun’19 of Rs. 22 crore to Rs. 85 crore in Jun’20.

This was due to two factors (i) Revenue Growth – Driven by “API’s” & (ii) Raw Material cost increased by only 20% as compared to 34% in revenue.

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Thus, Profit growth was fueled by both Revenue & Reduced Costs.

Bonus Issue

In times of Pandemic a Bonus issue by the company is a healthy sign and increases the confidence of the shareholders.

Bonus Ratio is very good .i.e. 3 shares for every 1 held .

This sort of Bonus issues were given by the IT companies in 90’s hence, the share price have rallied.

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The Future

There are three things company is actually looking at:-

Raw Material Cost – Since the company had dependence on raw material suppliers at China it is now reducing dependency on import of raw material by way of backward integration, manufacturing the material in-House & also developing alternative process to mitigate the risk of shortages.

The company have recently expanded it’s capacity in anti-inflammatory therapeutic category which contributes 11% of revenue (2019-20 , 13% Q1 2020-21) and now has planned capital expenditure for anti-diabetic products in FY 2020-21 along with intermediate & specialty chemicals.

At Q4 2019-20 Con-call , management said that EBITDA (OPM) is expected to be around 15-16% once the situation normalizes .

Thus it could be said that :-

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The company will increase it’s revenue in mid to long term .

Once the situation normalizes company will earn OPM of 15-16% and tax rate will be 25% so profit may be in range of Rs. 160 crore to 200 crore in near future.

Hence, valuations seems a bit stretched at current level but story for API’s manufacturers remain intact.


Disclaimer

Neither the author nor the stockinfopoint holds any share in ADL . The post is for education purpose only and not a recommendation to sell or buy. The investor shall do it’s own research or contact financial advisor before taking any decisions. We in anyway will not be held responsible.

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