Saral Gyan Hidden Gem April 2015

UNEXPLORED MULTIBAGGER SMALL CAP STOCKS
EQUITY RESEARCH REPORT
SMS PHARMACEUTICALS LTD. BSE CODE: 532815
NSE CODE: SMSPHARMA
Industry: Pharmaceuticals CMP: Rs. 534.40 (09/05/2015)
Market Cap: 4526.77 (INR in Millions) Target Price: Rs. 1100
Date: May 09, 2015 Time Period: 18 – 24 months
Saral Gyan Capital Services
An Independent Equity Research Firm
www.saralgyan.in | www.saralgyan.com

HIDDEN GEMS – APRIL 2015
- 2 - SARAL GYAN CAPITAL SERVICES
TABLE OF CONTENT
S.No Content Page No.
1. Company Background 03
2. Recent Developments 06
3. Financial Performance 07
4. Peer Group Comparison 09
5. Key Concerns / Risks 09
6. Saral Gyan Recommendation 10
7. Disclaimer 12

1. Company Background
SMS Pharmaceuticals Ltd. is a global player in API
manufacturing having strong research and
manufacturing team supported by state of art
facilities. Company started off as a single facility single
product manufacturing company in 1990 grew to be a
multi-location group having product list spreading
across an array of therapeutic segments. SMS Pharmaceuticals is currently having seven
multi product facilities in operation and two research centers; SMS Pharmaceuticals has
truly graduated in to big league with more than 850 employees working for it.
SMS Pharmaceuticals is an integrated pharma company with business presence in over
70 countries. SMS Pharmaceuticals is focused on API manufacturing and is the single
largest producer of anti-ulcer products and is renowned among the clientele for the
excellent quality of product and customer service.
The company is diversifying into CRAMS by creating research and manufacturing
facilities bettering the requirements of the regulatory markets to appeal to international
clientele. SMS Pharmaceuticals is venturing into highly specialized segments by building
its API and formulations manufacturing facility in Andhra Pradesh to target the niche
market segments.
Merger of Sreenivasa Pharma Private Ltd with SMS Pharmaceuticals Ltd has given a new
boost to the company, SMS Pharma has also completed the takeover of Plant Organics.
Recently SMS Pharmaceuticals has established new state of art corporate research
center with ultramodern facilities encompassing the whole gamut of research activity
viz. from product conception to development, scaling up and DMF preparation. This is
supported by well-equipped analytical wing and a fully functional pilot plant. This new
facility will enhance our existing offerings from a contract research and custom
synthesis point of view.
R&D at SMS Pharmaceuticals drives the company’s competitive edge, reflected in the
introduction of pioneering products and processes with a superior price-value
proposition. Strong R&D has been at the core of SMS growth since its inception.
Company started R&D activities with 4 doctorate scientists supported by 20 senior
chemists in a 10000 Sq.ft area.
SMS recently expanded its R&D facilities by creating a state of art corporate research
center with infrastructure and expertise to carry out all the activities from product
conception to the development, scale up, stability studies culminating in preparation of
the DMF.

Product range of the company includes:
 API and Intermediates
 Cytotoxic Solid Dose, Sterile Cytotoxic Liquid, and Lyophilized Products
 Bio Products
 Inorganic Products
 Nutraceuticals
Different divisions of the company:
Manufacturing: SMS Pharmaceuticals Ltd. is one of the leading pharmaceutical
manufacturing companies in India with world-class facilities with a wide range of
process equipment fully compliant with WHO GMP standards. SMS has over the years
developed tremendous manufacturing facilities to suit its style of operations and to
meet the requirements of USFDA and other regulatory markets. A total of 7 facilities are
being presently operated.
Research and development: R&D at SMS Pharmaceuticals drives the company’s
competitive edge, reflected in the introduction of pioneering products and processes
with a superior price-value proposition. Strong R&D has been at the core of company’s
growth since its inception. SMS Pharmaceuticals started R&D activities with 4 doctorate
scientists supported by 20 senior chemists in a 10000 Sq.ft area. Company recently
expanded its R&D facilities by creating a state of art corporate research center with
infrastructure and expertise to carry out all the activities from product conception to the
development, scale up, stability studies culminating in preparation of the DMF.
Company’s research team now comprises of about 100 scientists with expertise in
process research, analytical research and scale up. A dedicated project management
team handles costing, administration, purchase, and project monitoring. R&D
capabilities of the company span across reaction technologies, organic compound
categories, and novel catalytic systems. This center is capable of delivering top notch
contract research modules to international clientele.

Achievements / Recognition:
 SMS was given the export house status in the year 1997-98.
 Awarded the Prestigious 'Pandit Jawaharlal Nehru Silver Rolling Trophy' for the best
productivity effort in the state.
 Became the single largest producer of Ranitidine Hydrochloride in the World.
 One of the leading export houses exporting to more than 70 countries worldwide.
 WHO-GMP approved API manufacturing facilities in India (2 more to be operational
soon).
 Achieved ISO 9001 certification for Units at Khazipally and Bollaram.
 Awarded the prestigious US GCNC Green chemistry award.
 Successfull FDA audits in 2004 and 2008 at our Bachupally unit.
 Proven expertise in low cost process routes, commercialization & manufacturing.
 Over 21 process patents and 72 regulatory filings.
 Successful execution of contract research and manufacturing assignments.
 CRISIL renews SMS Pharma's SME 1 rating for FY 09-10.
 Recieved 'Best Industrial Productivity Effort in the State' silver rolling trophy.
Future plan:
SMS is building an ultra-modern API manufacturing facility near Vizag on the eastern
coast of India to cater to in house production needs and also for the emerging contract
manufacturing business.

2. Recent Development
USFDA Audit at Manufacturing Facility (Unit-VII) – Apr 2015
SMS Pharmaceuticals Ltd has informed that USFDA inspection to the Unit-VII located at
Kandivalasa Village, Pusapatirega Mandal, Vizianagaram District in the state of Andhra
Pradesh had successfully completed.
Successful GMP Surveillance inspection by USFDA of company’s UNIT-VII facility will help
company to drive its revenue growth through exports.
SMS Pharmaceuticals settles legal dispute with Natco Pharma – Nov 2014
SMS Pharmaceuticals announced that the legal disputes between the Company and
Natco Pharma have been amicably settled. Out of the settlement, the Company has
received a sum of Rs.15.07 crore from Natco Pharma apart from the balance principal
amount receivable from the respective courts
SMS Pharmaceuticals to invest about Rs 1000 crore in Andhra Pradesh – Sept 2014
Company is planning to gradually scale down production at its units in Telangana. On
the other hand, the company has decided to invest Rs 950-1,000 crore in Andhra
Pradesh over the next four-five years. The company has decided to reduce production in
its five pharma units in Telangana due to administrative problems. Last year, these units
generated a turnover of Rs 300 crore.
The company has two facilities in AP - in Vizianagaram and Srikakulam districts. It plans
to invest Rs 400 crore in Vizianagaram unit expansion and Rs 350 crore in the Srikakulam
unit. Company has taken 40 acres at the Pharma City in Vizag where it would set up an
API manufacturing plant with an investment of Rs 200 crore. As per company officials,
this would be ready in two-and-a-half to three years.
As informed by Ramesh Babu, Chairman of the Company, of the total required
investment, promoters would contribute 35 per cent while the remaining would be from
financial institutions. The company achieved a turnover of Rs 525 crore with about Rs 25
crore net profit during the last fiscal. Company is planning to reach turnover of 2,000
crore by 2019 in Andhra Pradesh.

3. Financial Performance
SMS Pharmaceuticals standalone net profit rises 37.74% in the Dec 2014 quarter
Net profit of SMS Pharmaceuticals rose 37.74% to Rs 115.7 million in the quarter ended
December 2014 as against Rs 84.0 million during the previous quarter ended December
2013. Sales rose 8.46% to Rs 1363.8 million in the quarter ended December 2014 as
against Rs 1257.4 million during the previous quarter ended December 2013.
SMS Pharmaceuticals standalone net profit rises 0.78% in the Sept 2014 quarter
Net profit of SMS Pharmaceuticals rose 0.78% to Rs 51.5 million in the quarter ended
September 2014 as against Rs 51.1 million during the previous quarter ended
September 2013. Sales rose 4.14% to Rs 1261.8 million in the quarter ended September
2014 as against Rs 1211.6 million during the previous quarter ended September 2013.
1 2 3 4 5 6
Net Sales 1289.36 1375.37 1627.7 1381.48 1350.09 1480.65
Net Profit 51.12 83.98 109.46 81.83 51.45 115.72
1289.36
1375.37
1627.7
1381.48 1350.09
1480.65
51.12 83.98 109.46 81.83 51.45
115.72
0
200
400
600
800
1000
1200
1400
1600
1800
RsinMillions
Sep 13 Dec 13 Mar 14 Jun 14 Sep 14 Dec 14
Last 6 Quarters Net Sales & Profit

Current & Expected Earnings
Quarterly Ended Profit & Loss Account
Expected Earnings in coming Quarters:
Successful USFDA Audit of manufacturing facility (Unit-VII) will help company to drive
revenue growth in near future. Company is also making significant investment in Andhra
Pradesh over next couple of years with ambitious growth plans.
We expect company will continue to deliver robust revenue growth with increase in
operating margins from exports by entering into new geographies during next 2 – 3
years.
Particulars
(Rs in Millions)
Mar
2014
Jun
2014
Sep
2014
Dec
2014
Mar
2015 E
Jun
2015 E
Audited / UnAudited UA UA UA UA UA UA
Net Sales 1627.7 1381.48 1350.09 1480.65 1765.83 1658.95
Total Expenditure 1398.81 1201.78 1193.58 1230.72 1492.46 1405.47
PBIDT (Excl OI) 228.89 179.7 156.51 249.93 273.37 253.48
Other Income 5.1 2.65 6.59 95.64 7.52 6.23
Operating Profit 233.99 182.35 163.1 345.57 280.89 259.71
Interest 10.1 40.42 40.8 46.57 42.01 41.28
Exceptional Items 0 0 0 0 0 0
PBDT 223.89 141.93 122.3 299 238.88 218.43
Depreciation 48.09 40.3 40.85 44.1 44.71 47.35
Profit Before Tax 175.8 101.63 81.45 254.9 194.17 171.08
Tax 66.34 19.8 30 139.18 73.21 64.27
Provisions & contingencies 0 0 0 0 0 0
Profit After Tax 109.46 81.83 51.45 115.72 120.96 107.81
Extraordinary Items 0 0 0 0 0 0
Prior Period Expenses 0 0 0 0 0 0
Other Adjustments 0 0 0 0 0 0
Net Profit 109.46 81.83 51.45 115.72 120.96 107.81
Equity Capital 84.65 84.65 84.65 84.65 84.65 84.65
Face Value (IN RS) 10 10 10 10 10 10
Reserves
Calculated EPS 12.93 9.67 6.08 13.67 14.29 12.74
Calculated EPS (Annualised) 51.72 38.67 24.31 54.68
No of Public Share Holdings 3054760 3054760 3054760 3054760 NA NA
% of Public Share Holding 36.09 36.09 36.09 36.09 NA NA

4. Peer Group Comparison
PEER GROUP
SMS
PHARMA
IND-SWIFT
LABORATORIES
VIVIMED
LABS
MARKSANS
PHARMA
CMP 534.40 36.05 347.80 56.95
52 W H/L 662.00/246.00 54.35/22.05 424.65/224.00 75.10/20.75
Market Cap 4526.77 1480.82 5625.95 23249.02
Results (in
Million) Dec-14 Dec-14 Dec-14 Dec-14
Sales 1480.65 1589.04 1058.57 1056.40
PAT 115.72 409.63 41.33 165.19
Equity 84.65 340.67 162.04 385.31
EPS 42.35 -27.53 10.99 1.47
P/E 12.63 0.00 31.58 38.69
5. Key Concerns / Risks
 The Company’s business activity is a single primary business segment of Bulk Drugs.
In view of higher capital investment, bulk drug manufacturers typically generate
lower return on capital employed as compared to formulation companies owing to
thin margins and high competition. Bulk drug business being completely driven by
scale of operations which results in high product concentration and pricing related
vulnerabilities
 SMS Pharmaceutical is in a competitive market and the challenges are both from
Indian manufacturers who have similar production facilities, as well as those in
China. Competing pharmaceutical companies have several similar bio-equivalent
products in the same markets manufactured at facilities that have been approved by
regulatory authorities. All of them stay focused on the same markets with the result
that price elasticity is tested and margins get eroded.
 Pharmaceutical industry sector is facing global competition and most effected by a
high attrition rate in India. Since this industry needs trained manpower who has the
requisite experience to meet the compliances with statutory requirements, good
manufacturing practices, good laboratory practices, QA and QC personnel along with
research personnel, high attrition can lead to impact on performance

6. Saral Gyan Recommendation
SMS Pharmaceuticals is developing a broad portfolio of DMFs/ANDAs through non-
infringing processes and intellectual properties for developing its products in
regulated markets. The Company is managing cost efficiency in manufacturing
environment approved by USFDA / European Regulatory Authorities. SMS Pharma
has strong presence across the pharmaceutical chain, manufacturing and marketing
active pharma ingredients (APIs/Bulk Drugs). The market segment for the products
of SMS demonstrates growth tends every year with raising volume and value.
SMS Pharmaceuticals has robust product portfolio spread over major product areas
encompassing Gastroenterological, Anti-Retroviral, Anti-Migraine, Anti-Fungal, Anti-
Hypertensive and other products. SMS Pharmaceuticals is the largest manufacturer
of Anti-Ulcer products in the world, having forged tie ups with MNCs in Anti-
Retroviral, Anti Migraine segments; significant revenue potential is envisaged apart
from consolidation of existing product revenues where company is market leader.
SMS Pharmaceuticals has set ambitious goal of achieving revenue of 2000 crores by
2019 (3.5X of current annual sales). The Company has world class manufacturing
facilities and an enviable basket of approved markets and strong relationship built
with some of the best names in the pharma industry. Company’s focus will be on
expanding the markets and increasing its product portfolio, by implementing these
strategies, company aims to increase its revenues, EBITDA and return on investment
higher than the industry average.
Company’s EBITDA and PAT margins are expected to improve going forward. During
last 3 years, company has achieved revenue and profit CAGR of 31.6% and 43% with
continuous improvement in margins.
Important Ratios Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014
Margin Ratios
Core EBITDA Margin(%) 9.37 15.47 16.10 -13.82 10.65
EBIT Margin(%) 6.89 11.31 10.93 20.85 8.54
Pre Tax Margin(%) 1.21 4.18 0.61 11.43 5.96
PAT Margin (%) 1.00 3.35 0.49 9.76 3.79
Performance Ratios
ROA(%) 0.57 1.85 0.24 5.26 4.16
ROE(%) 1.22 4.11 0.53 11.03 8.75
ROCE(%) 4.75 7.69 6.62 13.28 11.75
Financial Stability Ratios
Total Debt/Equity(x) 0.82 0.79 0.83 0.61 0.75
Company sold one of its facility to Mylan Pharma in FY13 for 173 crores and used
this fund to reduce debt, upgrading other facilities and working capital requirement.

Company has planned to invest Rs 950 - 1,000 crore in Andhra Pradesh over the next
four - five years. Company is planning to gradually scale down production at its units
in Telangana and increase in Andhra Pradesh which will yield better returns on
investment for the company considering new life sciences policy of AP government
under which state will provide subsidies in power, water and also provide land for
setting up of new life science industries in the state.
Management has paid dividend to shareholders since company got listed in 2007.
However, as company incurred losses in 2012, dividend was not paid out for FY12.
Considering ambitious growth plan of the company with expansion of its
manufacturing facilities, we expect dividend payout to remain low with dividend
yield below 1% during next couple of years.
YEAR Mar'10 Mar'11 Mar'12 Mar'13 Mar'14
EPS 2.40 8.39 1.44 25.32 20.38
Dividend / Share (In Rs) 1.00 1.50 0.00 2.00 2.00
Dividend Payout Ratio 35.0% 15.0% 0.0% 6.6% 6.9%
As per our estimates, SMS Pharmaceuticals Ltd can deliver bottom line of 370 million
for full financial year 2015, annualized EPS of Rs. 43.7 with forward P/E ratio of 12.2X
for FY15, valuation looks discounted compared to peers for a company which is
going through expansion and target to treble its revenue with improvement in
operating margins in next 3 to 4 years.
On equity of Rs. 84.65 million, the estimated annualized EPS for FY 14-15 works out
to Rs. 43.7 and the Book Value per share is Rs. 291. At current market price of Rs.
534.40, stock price to book value is 1.8.
Considering company’s plan to work towards optimizing the capacities of its existing
manufacturing facilities, adding additional capacities to drive revenue growth, and
improving operating margins by offering broad product portfolio, Saral Gyan
team recommends “Buy” on SMS Pharmaceuticals Ltd at price of Rs. 534.40 for target
of Rs. 1100 over a period of 18 to 24 months.
Buying Strategy:
 70% at current market price of 534.40
 30% at price range of 470-500 (in case of correction in stock price in near term)
Portfolio Allocation: 3% of your equity portfolio.

7. Disclaimer
Important Notice: Saral Gyan Capital Services is an Independent Equity Research Company.
© SARAL GYAN CAPITAL SERVICES
Nothing published herein or on www.saralgyan.in / www.saralgyan.com should be considered as
personalized investment advice. Although our employees may answer your general customer
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situation. No communication by our employees to you should be deemed as personalized
investment advice. This document prepared by our research analysts does not constitute an offer
or solicitation for the purchase or sale of any financial instrument or as an official confirmation of
any transaction.
It should be noted that the information contained herein is from publicly available data or other
sources believed to be reliable. Neither Saral Gyan, nor any person connected with it accepts any
liability arising from the use of this document. This document is prepared for assistance only and
is not intended to be and must not be taken as the basis for any investment decision. The
investment discussed or views expressed may not be suitable for all investors. The user assumes
the entire risk of any use made of this information. The recipients of Saral Gyan material should
rely on their own investigations and take their own professional advice. Each recipient of Saral
Gyan should make such investigations as it deems necessary to arrive at an independent
evaluation of an investment referred to in this document (including the merits and risks
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investment. Price and value of the investments referred to in this material may go up or down.

Saral Gyan Hidden Gem April 2015

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