Result Snapshot

Ankur Drugs and Pharma’s Q1 FY08 results paralleled our expectations. Consolidated net sales jumped 127% YoY (our expectation: 115%) and net profit rocketed 126% (our expectation: 120%). The Vaibhav Healthcare merger has been delayed, pending regulatory Approvals, and is likely to be completed by Oct.’07. Hence, the quarterly Results have been declared on a standalone basis. Production at the tablets and capsules section of the new Baddi plant commenced in Aug.’07. The injectables plant is likely to go on stream in Oct.’07. This would result in a substantial jump in sales and profitability.

Result Highlights

Strong sales growth

Ankur Drugs & Pharma’s standalone Q1 FY08 results present a 61% YoY jump in net sales—from Rs 605 million to Rs 970 million—due to the substantial expansion at its Daman facility. Its group company, Vaibhav Healthcare Pvt. has reported sales of Rs 403 million. Hence, consolidated sales for the quarter were Rs 1,373 million (our expectation: Rs 1,300 million). As the amalgamation of VHC has been delayed due to regulatory issues, the company has declared standalone results. The company’s new manufacturing plant at Baddi for tablets and capsules went on stream in Aug. ’07. The injectables plant at Baddi is likely to go on stream in Oct. ’07. These would result in a substantial rise in the company’s sales and profitability. Production at this plant would be eligible for excise duty and income tax benefits.

Drop in margin

The standalone operating margin dropped 100bp—from 15.4% to 14.4%—due to the rise in material costs, which shot up 180bp—from 78.4% to 80.2% of net sales—from the change in product mix. Personnel expenses slipped 40 bp—from 1.2% to 0.8% of net sales—due to strong sales growth. ‘Other expenses’ too dropped, 50 bp—from 5% to 4.5% of net sales—due to strong sales growth and a tight control on the overheads. Ankur is one of the few pharma companies that have the lowest personnel and overhead costs.

Higher interest

Interest cost jumped 114%—from Rs 16 million to Rs 34 million—due to enhanced working capital in view of the strong top line growth. This is likely to rise further due to the new facilities going on stream during the year.

Net profit improved

Net profit shot up 54%—from Rs 58 million to Rs 90 million—due to strong volume growth and a lower tax provision. VHC has reported net profit of Rs 41million during the quarter. Hence, the consolidated net profit for the quarter was Rs 131million (our expectation: Rs 128 million).

Investment positives

The Company has expanded, by over 50%, its manufacturing plant for various pharmaceutical formulations. These are likely to significantly increase the company’s sales and profitability from Q3 FY08.

In view of the expansion, the company is enhancing its customer base. Many domestic and international pharma companies have audited Ankur’s facilities for outsourcing.

Since the manufacturing facilities at Baddi comply with the US FDA norms, the company is likely to receive approval from the US FDA by FY10.

The company has entered into technology agreements with Labtec (Germany) and Applied Pharma Research (APR), Switzerland, to manufacture and market Rapid Film formulations, Cold Fleece patches and Fentanyl Transdermal patches in India and the neighboring countries. Commercial production of these products is expected to start from Jan.’08. We expect the company’s sales of these products in FY08 and FY09 would reach Rs 368 million and Rs 2,016 million, respectively.

Financials and Valuations

On a consolidated basis, we expect CAGRs of 62% in net sales and 73% in net profit over the next two years — from the merger of the group company, sales from Rapid Film formulations and the expansion of the manufacturing plant. We expect the operating margin to improve—from 15.4% in FY07 to 16.1% the next year, and further to 16.9% in the year following. The margin improvement is likely to come from economies of scale and the introduction of Rapid Film products. The CMP of Rs 397 discounts the FY08E EPS of Rs 22.5 by 17.6x and the FY09E EPS of Rs 41.3 by 9.6x. We retain our BUY recommendation for the scrip.