shasun chemicals · •swot analysis •financials contents. amit nalin securities pvt. ltd. 4 22nd...

22nd Mar,2006Amit Nalin Securities Pvt. Ltd. 1

ANSec

Shasun Chemicals

CMP:- Rs 91.40 - BUY


ANSecPromoters

42%

Institutions

16% Foreign

13%

Public &

Others

29%

Equity Data

EPSe (FY0603e) 6.93

Market Price. 91.40

52 Week High/Low 110.90/67.20

P/E Ratio 13.19

Market Cap 439.18cr

Equity 9.61

Bookvalue (FY0603e) 33.97

ROCE - % (FY0603e) 25.88

RONW - % (FY0603e) 20.39 75

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85

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200503 200506 200509 200512 200601 200602

6400

7100

7800

8500

9200

9900

10600Shasun - SP Sensex


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• Investment Rationale

• Background

• SWOT Analysis

• Financials

Contents


ANSecInvestment Rationale

Acquisition of Rhodia facilities target date : 31st Mar’06

ShasunChemicals

Contract Manufacturing for Formulations commissioned

in Pondicherry in FY’06

Contract Research - Rs. 25cr facility completed in FY0506.

Growth from Contract Research and Manufacturing


ANSecCRAMS – Growth Area

• Contract Research & Manufacturing Services (CRAMS) the growing

segment which only accounted for 8% of total revenue in

FY05, registering a growth of 23% over FY04.

• CRAMS contribution is expected to increase to about 17% by FY08e

with generic exports to start contributing to revenues from FY08e.

• Shasun has set up an additional R&D center, with an estimated cost of

Rs.25cr and a formulation facility at Pondicherry has commissioned in

mid 2005, to capitalize on its relationships with global majors for

CRAMS.


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Shasun has been following the partnership approach in all the segmentsof the business. To prevent conflict of interest, the company has notlaunched finished dosage forms on its own in the internationalmarkets, and remains only a supplier.

Strong Partnership Model for CRAMS

Business Major Products Notes Partner

Generic 10 products Supply for 3 products Alpharma (Actavis)

Formulations to commence in FY07

12 products Supply for 4 products Glenmark

to commence in FY07

CCS Austin Chemical

Intermediates Codexis

Excipients HPMCP Eastman Chemical


ANSecContract Research a Focus Area

Both the alliances with Austin Chemicals, and Eastman Chemical Company have helped strengthen the company's focus on becoming a R&D driven manufacturing company. Its research facility in Chennai undertakes contract research under the Full Time Equivalent (FTE) model & under the Custom Synthesis model.

Active Pharmaceutical Ingredients (API): Here the target would be bulk drugs going off patent between 2006 and 2010 with special emphasis on non-steroid anti-inflammatory (NSAID) and anti-ulcerative categories.

Intermediates: The focus would be on advanced stage intermediates, which are in phase 1,2 or 3 of clinical trials. Custom Chemical Synthesis (CCS) has become a research priority area in order to cater to the entire CRAMS value chain. It has a pipeline of 6-7 CCS projects on hand. Shasun offers CCS services for the North American market through Austin Shasun LLC, a joint venture with Austin Chemical Co, USA.


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• Process Research

Process development for new molecules or part molecules for major research and development companies in Europe & US.

Expansion of R&D Facilities

Capex of Rs.20crs was incurred in FY’05. Projected Capex for FY’06e isRs.25crs. This Capex will be incurred without any equity dilution.

Rs.90m has been budgeted for a Bio-Genetic Research Facility.


ANSecRhodia Acquisition

• Shasun has signed a letter of intent to purchase the Custom ChemicalSynthesis (CCS) business of Rhodia Pharma Solutions (RPS), the core ofwhich is the ChiRex business that Rhodia acquired in 2000 for $545mnand is expected to be written down substantially further beforeacquisition.

• The companies say they are targeting 31st Mar’06 for the completion ofthe deal. The purchase price has not been disclosed. Further, its notbeen mentioned whether Rhodia would have any stake in thisacquisition.

• Under the preliminary agreement, India-based Shasun will take overRhodia’s custom synthesis plants in Dudley & Annan, UK Rhodia willretain the bulk Pharma business which manufactures aspirin andacetaminophen in France, Thailand & China.

• Under the proposed deal Shasun would also attain Rhodia’s technologyand patent areas including hydrolytic kinetic resolution, aromatic bondformation, and radical trifluoromethylation.


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• The agreement comes after months of speculation as to whetherRhodia would retain the business. Last year, the company wrote off$125mn in the value of RPS. A Rhodia spokesperson says RPS reporteda loss of $24mn in the first three quarters of 2005, all due to itscustom synthesis operation (CCS).

• The proposed acquisition fits Shasun’s strategy of enhancing its globalpresence in API’s, custom synthesis & contract manufacturing.

• “Shasun will be in a better situation to serve Pharma industry clientsthroughout the drug life cycle by offering services for pre-launch, launch, post launch supply as well as late-life cycle.”


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Rhodia at Dudley occupies a 42 acre site, sevenmiles from the centre of Newcastle upon Tyne.Three manufacturing plants produce a range ofpharmaceutical intermediates and API’s fromgram scale to multi tonnes.The site houses a stateof the art cGMP pilot plant with full R&D supportinfrastructure, a site services complex and anonsite biological waste water treatment facility.

The site provides pharmaceutical developmentservices, small-scale production of advancedintermediates and the manufacture of activeingredients for a number of highly sophisticatedlife saving and life enhancing medicines. Theseinclude products that are used to treat anythingfrom migraines and simple allergies todepression, high-cholesterol, Parkinson's andAlzheimer's Disease.


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Rhodia at Annan,Scotland occupies 27 acres of a154 acre site at Newbie, a couple of miles outsideAnnan in Dumfriesshire.

With four independent production facilities, theAnnan site manufactures a range of bulkAPI's, fine chemical products and advancedintermediates used in a range of medicines andtreatments for human health. The site has been inexistence since 1977. It specialises in custommanufacture and product development.

The products are used in treatments for variousconditions such as high bloodpressure, asthma, ulcers and viruses. The site isregularly inspected by the US Food & DrugAdministration.


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• The company has adopted a de-risked model for accessing thegenerics markets as it will not be filing the ANDA’s and thus, will notbe liable for any litigation risks (if any). It has also been indicatedfurther, that the partners will reimburse Shasun Chemicals for thedevelopment costs for these products in the form of upfront andmilestone payments. Also, profits from the generic products will beshared equally.

• Filing of ANDA’s by its partners will also ensure that Shasun does notdirectly compete with innovator companies in the regulatedmarkets, thus preventing a conflict of interest with its CRAMS business(wherein the innovator companies will be its potential customers)

• The company has incurred a Capex of Rs.40crs in FY05 towards itsmanufacturing facilities, and is expected to incur an additionalRs.25crs towards its formulation facilities in FY06.

Formulations Contract Manufacturing


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• Shasun has tied up with Alpharma (now acquired by Actavis) andGlenmark for generic supplies (formulations) to be launched over thenext five years. These tie-ups cover about 22 products (12 withGlenmark, 10 with Alpharma).

• Shasun is planning to enter into generic sourcing arrangements with 1-2 more generic companies for the regulated markets since it alreadyhas manufacturing capabilities in place.

• The new arrangements could cover about 5-10 additional productswith revenue streams from them accruing from FY08e onwards. Thiswill take Shasun’s combined generic pipeline to about 25-30 products.


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•Shasun Chemicals is an integrated pharmaceutical research andmanufacturing solutions provider.

•Its engaged in the manufacture of active pharmaceutical ingredients(APIs) with a significant presence in the anti-inflammatory and anti-ulcerative therapeutic groups. In addition, the company is strengtheningits offer of contract research, custom synthesis and contractmanufacturing services to clients.

•It exports products to 40 countries, mostly regulated, with customerscomprising some of the world's largest pharmaceutical companies.

•Headquartered in Chennai (India) and supported by offices in USA andthe UK. The company operates out of world-class facilities at Cuddaloreand Pondicherry in South India.

Background


ANSecManufacturing Plants

Plants Facilities

1. Pondicherry : API’s – Ibuprofen & its derivatives

- Formulations

2. Cuddalore : (Multi-Product Facility) API’s & Excipients –Ranitidine/Nizatidine

3. Chennai : Biotech Centre (Recently commissioned)

: R&D Centre – Custom Chemical Synthesis (Recently commissioned)

Marketing Setups:

1. Shasun UK (Branch) 2. Shasun USA (Subsidiary)


ANSecMature Product Portfolio

Matured Products (expired patents) – Ibuprofen, Ranitidine, Nizatidine contribute to 85% of company’s revenues. Mature products contribution is expected to decline from about 85% (FY05) to about 78% in FY07e and 67% in FY08e.


ANSec

Ibuprofen

World’s largest manufacturer

(25% of world market share)

Cost pressures for some of its Inputs used for manufacturing would keep margins under pressure.

Partnership

Boots, Aventis, Abbot

Contribution

50% of Turnover

Nizatidine

Facility has reached 100% utilization.

Partnership

Boots, Aventis, Abbot

Contribution

18% of Turnover

Ranitidine

74% of sales were made to one customer.

GSK had increased its sourcing to meet the increased demand, resulting in a 50% jump in Sales for Shasun. Since this was a one time increase, revenues are expected to decline in the short term.

Partnership

Eli-Lilly, Reliant Pharma

Contribution

17% of Turnover


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Products such as

• Isradipine (Anti-Hypertensive)

• Gabapentine ( Anti- Epileptic)

are expected to report a significant growth in the next two-three years.

The company also has Methohexital (Anaesthetic) under its umbrella in the active ingredients space discussed above.

New Product Introductions


ANSecSWOT AnalysisStrengths

• Manufacture varying volumes in line with cGMP standards

• Deep-Seated R&D Capabilities.

• Long standing Relationship with Multi National Innovator companies in the area of API supply, CRAMS.

Weaknesses

• Major part of company’s revenues are derived from three mature products.

• Not much of focus on domestic sales in lieu of lower realizations in a DPCO dictated Indian Pharma environment, which may hinder potential growth if Indian demand strengthens.

Opportunities

• Growing Outsourcing, number of products going off-patent.

• Enhanced value-creating opportunities in formulations manufacture through a better leverage of existing relationships and research capabilities.

Threats

• Increasing number of players in CRAMS space


ANSecConcerns

• Concentration of Revenues (%)

• CRAMS – Long Gestation Period

Post announcement of the contract, depending on the type ofcontract it could take a year or less for the supplies to begin.

• Rhodia Acquisition

Rhodia acquisition will be a revenue accreditor, but whether it will bean earnings accreditor in the short term remains a concern.

21

50

63

0 10 20 30 40 50 60 70

Top Customer

Top 5 Customers

Top 10 CustomersThe company depends on a few largecompanies for a majority of itsrevenues.

Shasun is lowering its shares fromthe top customers, entering newmarkets & new customers.

Concentration of Revenues%


ANSecRevenue Break-Up

FY04 FY05 FY06e FY07e FY08e

Ibuprofen 157.40 160.43 164.44 174.38 180.30

% of sales 61% 50% 48% 44% 38%

Ranitidine 36.82 55.22 46.80 53.54 57.11

% of sales 14% 17% 14% 13% 12%

Nizatidine 29.30 58.46 73.08 84.66 81.25

% of sales 11% 18% 21% 21% 17%

CRAMS 20.83 25.65 37.96 59.35 79.16

% of sales 8% 8% 11% 15% 17%

Formulations 0.00 0.00 0.00 0.00 45.00

% of sales 0% 0% 0% 0% 10%

Others 11.89 18.85 22.23 26.45 25.67

% of sales 5% 6% 6% 7% 5%

Total Gross Sales 256.24 318.62 344.51 398.38 468.49


ANSecIn Rs. Crore

FY03-04 FY04-05 FY05-06e FY06-07e FY07-08e

Gross Sales 277.42 337.33 358.71 413.58 490.69

Excise Duty 9.81 10.21 10.86 12.04 16.41

Net Sales 267.61 327.12 347.85 401.54 474.28

Other Income 1.45 0.82 0.84 1.08 1.32

Total Income 269.06 327.94 348.69 402.62 475.60

Total Exp 215.39 258.72 278.48 320.43 372.31

PBIDT 53.67 69.22 70.21 82.19 103.29

Interest 5.15 3.38 4.78 6.78 8.93

PBDT 48.52 65.84 65.43 75.41 94.36

Depreciation 16.89 21.59 23.35 24.56 33.20

Tax 7.79 13.21 8.79 10.70 11.35

Net Profit 23.84 31.04 33.29 40.15 49.81

EPS (Adj. Split) 5.21 6.78 6.93 8.36 10.37

Equity 9.13 9.15 9.61 9.61 9.61

FV 10.00 10.00 2.00 2.00 2.00

PBIDTM (%) 20.06 21.16 20.18 20.47 21.78

PATM (%) 8.91 9.49 9.57 10.00 10.50

Financials: P/L Statement


ANSecFinancials: Balance Sheet

2004 2005 2006E 2007E 2008E

SOURCES OF FUNDS:

Share Capital 9.13 9.15 9.61 9.61 9.61

Reserves Total 104.70 128.02 153.62 183.34 222.38

Total Shareholders Funds 113.83 137.17 163.23 192.95 231.99

Total Debt 55.70 89.30 83.40 89.05 56.40

Deferred Liability 14.30 21.71 24.71 28.03 32.03

Total Liabilities 183.83 248.18 271.34 310.03 320.42

APPLICATION OF FUNDS:

Net Block 132.26 156.48 162.11 188.01 159.37

Capital Work in Progress 3.85 16.98 20.56 4.56 6.60

Investments 0.16 0.16 0.17 0.17 0.17

Net Current Assets (A-B) 46.56 74.28 87.80 116.74 153.63

Miscellaneous Exp. 1.00 0.28 0.70 0.55 0.65

Total Assets 183.83 248.18 271.34 310.03 320.42

In Rs. Crore


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Thank You

Amit Nalin Securities Pvt. Ltd.

515/Maker Chambers V, Nariman Point, Mumbai – 400001

Tel: 22048329/22854103

Email : [email protected]

Research Team:

• Rujuta Dalal

• Bhavin Shah

• Pallavi Kapale

• Anuj Anandwala

shasun chemicals · •swot analysis •financials contents. amit nalin securities pvt. ltd. 4 22nd...

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