Research: Fermenta Biotech Ltd. – Can Fermenta Give Strength to Your Portfolio?

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Vitamin D for the strengthening of bones. And Fermenta Biotech is one of the largest API manufacturers in the world for vitamin D3. First, we should know a bit about Vitamin D (DCAL is another in India )

Sources of Vitamin

Food

Very few foods in nature contain vitamin D. The flesh of fatty fish (such as salmon, tuna, and mackerel) and fish liver oils are among the best sources. Small amounts of vitamin D are found in beef liver, cheese, and egg yolks. Some mushrooms provide vitamin D2 in a variable amount. Mushrooms with enhanced levels of vitamin D2 from being exposed to ultraviolet light under controlled conditions are also available.

Sun Exposure

Most people meet at least some of their vitamin D needs through exposure to sunlight.
Ultraviolet (UV) B radiation penetrates uncovered skin and converts skin 7 dehydrocholesterol to previtamin D3, which in turn becomes vitamin D3. Season, time of day, length of day, cloud cover, smog, skin melanin content, and sunscreen are among the factors that affect UV radiation exposure and vitamin D synthesis.

Dietary supplements

In supplements and fortified foods, vitamin D is available in two forms, D2 (ergocalciferol) and D3 (cholecalciferol). Vitamin D2 is manufactured by the UV irradiation of ergosterol in yeast, and vitamin D3 is manufactured by the irradiation of 7-dehydrocholesterol which is made from cholesterol obtained from the extraction of lanolin that is woolgrease. ( Fermenta produce Vitamin D3 by this method)

How Fermenta manufactures Vitamin D3?

Sheep are vitamin D machines; their woolly fleece is coated in a substance called lanolin, a waxy oil that protects them from extremes of winter weather. It’s the cholesterol extracted from the sheep’s wool, which is used for making vitamin D.

The sheep are not harmed in any way during this process. After shearing for the summertime, a process which involves the sheep farmer removing the thick fleece with electric clippers, the wool is sent off to be thoroughly washed and the lanolin separated from the wash water.

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Now in the form of a gold-coloured waxy substance, the lanolin is bottled and sent to a refinery. The clean wool can then be used for making carpets and garments.

The next stage in the process is a plant where lanolin is purified, refined, and finally
crystallized as cholesterol, now in crystal form and resembling white sugar, is
dispatched to the lab. This is where sunshine, or simulated sunshine, plays its part.
The cholesterol is further processed and exposes it to extremely powerful UV light. This
precisely-timed operation mimics the effect of sunshine on the substance, creating
the synergy which results in the manufacture of vitamin.

Vitamin D Market

The vitamin D market is estimated to account for about USD 1.1 billion in 2020 and is
projected to reach a value of nearly USD 1.6 billion by 2025, growing at a CAGR of 7.0% from 2020 to 2025. The vitamin D market has been growing in accordance with the rise in
demand and consumption of feed around the world.

The feed industry is witnessing an upward trend in demand for enriched feed products, which supports the demand for nutritional additives such as vitamin D. The key driving factors of the vitamin D market include increasing consumer concerns regarding maintaining a balanced diet and growing consumer awareness about several diseases caused by vitamin D deficiency.

Food fortification is one of the major trends, which is fueling the vitamin D market in the
functional food & beverage industry.

Many studies claim that its beneficial effects in the prevention of heart disease and diabetes and many cancers. ( Although overuse and very high vitamin D is also dangerous) .

Right now, Vitamin D demand is very high because several research reports say
its beneficial effects in preventing serious COVID infection.

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Some thing about Fermenta Biotech

It has 3 manufacturing units:


1-Kullu (Himachal Pradesh)
Set up the Biotech plant in 1987 to manufacture Penicillin G Amidase and Acylase enzyme. A new bulk drug division in 2004 to manufacture various APIs like Vitamin D3,
Phenyramidol HCI and Silicon Powder.


2-Dahej (Gujarat) – Vitamin D3
Established a dedicated greenfield manufacturing facility in 2011 to primarily manufacture Vitamin D3.

3-Dahej (Gujarat) – Backward Integration for Cholesterol
In 2019, FBL implemented backward integration for manufacturing cholesterol which will cover 100% requirements ( Till now raw material was imported from Netherlands and
Japan).

In January 2019, as part of its long-term capacity expansion plans, it entered into a 99-year lease agreement to acquire about 40,000 sq mt of land from the Gujarat Industrial Development Corporation (GIDC) authority, Ankleshwar, Sayakha.

The company intends to commence manufacturing by the end of 2020. ( AIM – From single Vitamin D3 to multivitamin, the company aims to widen its nutraceuticals ingredients basket
within the next 5 years).

Company is also working on Veg Source of Vit D ( Phytosterol which is found in
Vegetable oils, nuts, grains, cereals, wood pulp and leaves I don’t know what
the source they will opt for )
.

Source: FBL

Other Products

  • The company is also involved in the manufacturing of APIs for muscle relaxant and anti-flatulent applications
  • FBL delivers innovative enzymes used in the manufacturing of antibiotics and involved in environmental solutions used for wastewater treatment and management
  • The company also has legacy properties at Thane and Worli in Mumbai for which it realizes significant rental income

Real Estate

  • 45 Acres of freehold land at Takawe, Pune
  • 10,000 sq. ft. leased area at Worli, Mumbai
  • 200,000 sq. ft. the leasable area in Thane
  • 6 Acres of freehold land at Thane
  • The approximate market value of the real estate is 500 Cr
  • Real estate lease rentals help sufficiently service debt
  • SHP– Promotors holding 59.44%( Reduced promoter holding due to share arrangement between DIL and Fermenta)
  • Debt– The company has a long term debt of approximately INR 150 Cr with a low average cost of debt at 7% pa. ( For Pharma business they got funds at 3-4% and real estate is around 9-10%). Over 50% of the long term debt is towards the real estate business where the lease rentals are self-sufficient enough to take care of the principal repayment and interest
  • CFO– FY 20- 34 Cr, FY 19-90 Cr ( I am not good in financials so somebody can look at that part and give his/her opinion about balance sheet)
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I am not mentioning about other financial like PE, ROCE, ROE, EV/EBITDA because
of of recent merger of DIL and Fermenta ( I don’t know the financial implication of
merger
, if somebody knows then can enlighten me)

Growth Triggers

  • Massive demand due to COVID ( unsustainable ) but even after COVID I feel demand will be there because of growing awareness about its benefits in maintaining good health and increased use in various feeds, supplements’.
  • Backward integration will lead to sustainable margin expansion
  • The upcoming project where it will manufacture other vitamins, minerals, antioxidants, probiotics (In short Entire Health supplements products)

Disclosure – I am holding in my portfolio and would like to add more
between 200-250
.

It’s not a recommendation. It’s my personal view about the company .

Prepared by : Dr. Prashant Mishra (MBBS, MS, MCh)

Edited by : Unmesh Dahake

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Dr. Prashant Mishra
Dr. Prashant is a Cardiac surgeon at Sion Hospital and Thunga Hospitals. He is also a Professor at LTMG.
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