The Hindu Business Line : Shasun Chemicals: Hold/Buy on declines

SHAREHOLDERS of Shasun Chemicals can continue to stay invested in the stock. Those looking to add the stock to their portfolio can do so on dips from current price levels. The stock appears to be good from a medium-to-long term perspective.

Background

Shasun is primarily into the manufacture of active pharmaceutical ingredients (APIs; used in making finished drugs) and its product portfolio includes ibuprofen (an anti-inflammatory), and ranitidine and nizatidine (anti-ulcerants).

The company is the largest producer of ibuprofen in the world and one of the leading producers of the ranitidine in the country. About 80 per cent of the company's revenues comes from the above-mentioned APIs, with excipients (tablet coatings), contract research/ custom synthesis contributing the rest.

Financials

For the year ended March 2003, sales at Rs 247.2 crore rose 12 per cent, in line with the growth rates in the pharma sector. Profits at the operational level have risen by about 15 per cent at Rs 41 crore (Rs 35.8 crore for the year ending March 2002).

The increase has been made possible by lower raw material costs, which have declined by three percentage points as a percentage of sales.

A higher depreciation outgo has been partially offset by a reduction in interest costs. This has enabled Shasun post a 34 per cent jump in net profit at Rs 16.1 crore.

Prospects

Being primarily a player in the bulk drug space, Shasun has a strong focus on the export market with Boots Pharma and Glaxo (Singapore) as its customers for ibuprofen and ranitidine respectively. Such a focus would enable it to offset the falling realisations for these drugs in the domestic market as both ibuprofen and ranitidine fall under the purview of price control.

Not only are regulated markets more lucrative, the nature of contracts with MNCs is such that it assures a steady revenue stream and such MNCs are loath to shift suppliers as it would entail sizeable switching costs.

Recently, the company signed a letter of intent with Eli Lily of the US to make and supply the anti-tuberculosis drug, cycloserine.

Such developments only affirm the confidence that multinationals have on Indian manufacturers such as Shasun.

Contract research and contract manufacturing would continue to play an important role in determining Shasun's future prospects.

As companies worldwide increasingly concentrate on their core competence of drug development, they would farm out certain modules of research to Indian firms that offer them the twin benefits of lower costs as well as skilled workforce.

Shasun, with its emphasis on research and development and the links it has forged with multinationals, should be in a position to grab a slice of this expanding market.

Additionally, with drugs worth close to $40 billion coming off patent in the next few years, generic manufacturers would be on the lookout for suppliers of quality bulk drugs at competitive prices. This is also an opportunity that Shasun could capitalise on.

Stock outlook