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Taking Stock New


In a new series for 2017, we look at analyzing one stock on a regular basis. These are often stocks we like, but don’t necessarily come into a Capitalmind Portfolio. The first one for 2017 was the gold loan company: Manappuram Finance. This time we look at Sunil Healthcare.

SUNLOC is the brand of Sunil Healthcare. It is the second largest producer of Empty Hard Gelatin Capsules [Global empty capsules market is expected to reach $2.57 billion by 2024] in India. The Hard Gelatin Capsule Shell are used by Pharmaceutical and Food supplement Companies as a container for administering various medicines and food supplements.

Also known as soft gels, Gelatin Capsules can be easily digested and the contents of the capsule dissolves within minutes of reaching the stomach. Since they are air tight sealed capsules, they are tamper-evident. However, since these Gelatin Capsules are made from beef or pork, the individual can alternatively empty the contents of the capsule and pour it into water or juice. (If religion or diet constrains them from the constituents)

The company was started back in 1976 with an investment Rs. 1.5 crore only as an API manufacturer with production of Methyldopa [medication used for high blood pressure which it exited in the late 80s] and also Empty Hard Gelatin Capsules Shells [with installed capacity of 200 million] and got listed on the Bombay Stock Exchange in January, 2014.

This experience of close to 5 decades now is what the company counts as the competitive advantage which means that its good relations with pharma companies remains healthy and robust.

Its clients include Abbott, Cadila, Dabur, Intas, GSK (GlaxoSmithKline), Himalaya, Medopharm, Pfizer and Wyeth among its overall customers.

Production

Manufacturing of these capsules are performed at its only manufacturing plant located in Alwar (Rajasthan). This plant has the capacity to push out 11 billion capsules p.a. [however, the capacity utilization in FY16 stood at 85% only] from its 22 automatic production lines.

India’s installed capacity is close to 100 billion capsules per annum which effectively means that the company has a market share of only 10% of the market, with the remaining 90% with the leader ACG Worldwide who is number 1 in terms of installed capacity in India. ACG was set up by two brothers – Mr. Ajit Singh and Mr. Jasjit Singh, ACG Worldwide, or Associated Capsules Group as it was known then, began its operations in Mumbai, India.

Sunil HealthCare is considered to be one the of the Top 10 manufacturers of empty capsules and ranks 9th on the list of Top 10 [which have Capsugel, ACG Worldwide, JC biological technologies, Capscanada Corporation, Medicaps Ltd, Qualicaps, Patheon Ltd, Roxlor LLC., Sunil Healthcare Ltd, and Nectar Lifesciences Ltd].

The plant has regulatory approval from the United States Food and Drug Administration (US FDA) as part of the Drug Master File (DMF) on the 5-May-2012 and categorized as a Type IV application which means that the manufacturing facility uses Excipient, Colorant, Flavour, Essence, or Material Used in Their Preparation.

In addition to the US FDA approval, the plant is WHO-GMP certified– an important certification helping the company serve other markets such as the European, African and Latin American Continents. One other certification worth mentioning is the Halal-JAKIM Malaysia – provided for food that is fit for consumption under laws of Islam.

The company has maintained a constant Brownfield Expansion of the manufacturing plant:

  • In 1976, the plant had a capacity of 200 million capsules per annum.
  • Since inception to the year ended 2011-12, with gradual expansion – the plant had increased its capacity from 200 million capsules per annum to 7,000 million capsules per annum.
  • In 2012-13, two new capsule machines were installed and commissioned resulting in an increased production from 7,000 million capsules to 7,700 million capsules per annum.
  • During 2013-15, with the installation of additional capsule machines production, capacity increased to 8,430 million capsules from the earlier 7,700 million capsules. This was followed with installation of fully automatic capsule inspection machines so as to reduce the dependency on human capital.
  • In 2015-16, the new installed production capacity went up to 10,930 million tablets. The latest expansion to 11 billion Capsules comes at a cost of Rs.18 crores for modernization and capacity expansion [from 10 billion to 11 billion Capsules the benefit of which will be realized before the end of the financial year].

The company has maintained the belief that in the long run, returns would improve though the domestic markets frequently sees new players and increased capacity additions.

Innovations

The wide range of products manufactured by the company for the capsule market range from Preservative Free, Liquid Filled, Stick Free, Flavoured and many more varieties of capsules to serve the broad market of customers.

The latest innovation from the company R&D department [which witnesses expenditure in the range of 1-1.5% of the annual net sales] has been the “Triple Lock Capsule” which are suitable for large pharma companies that have a very high customization requirement in terms of strength and appearance.

After this innovative product came the HPMC Capsules (Hydroxy Propyl Methyl Cellulose) capsules catering to Vegetarian and varied culture needs. The supply of this product to the international markets derives a higher margin for the company which it hopes to expand in the future.

Other Business

In 2013 the company forayed into the food business with Sunloc Foods which at its nascent stage engaged in the marketing activities i.e. importing & exporting of spices and various food products.

A more specific activity of this end of the business today remains marketing of Cashews and Nuts. Other products offered range from Dehydrated Vegetables, Frozen Vegetables, Frozen Fruits and Exotic Commodities like Cashew Nuts, Raw Cashew Nuts, Pistachios, Almonds, Walnuts and Peanuts.

Revenue contribution from this division stood at 11.7% [Contribution in 2013-14 stood at Rs. 2.7 crore, 2014-15 Rs. 10.77 crore]. Though this is very minuscule, the company has this to be a pure trading income with low capital employment with a high ROCE.

2015-17 Performance

  • Capsule and Food Division generated business of Rs. 72 crore up from the previous year at Rs. 61.9 crores. The growth at 16.5% was in spite of significant headwinds faced in the export market which contributed 40%-50% of the revenue [which has won them the “Recognized Star Export House” award].
  • Domestically, North and West India contribute a major part of the Company’s revenues because of the sheer size of the market and convenience of logistics.
  • Very recently the company has expanded its foot print to the US markets with the incorporation of the wholly owned subsidiary “Sunil Healthcare North America LLC” on the 26th July, 2016. Closer to this New Year, the company incorporated its Mexican subsidiary with “Sunil Healthcare Mexico SA DE CV”.

Sunil Healthcare has decent operating margins of about 18%. They have a Return of Equity of about 17%, given that they make 5.2 cr. of profit for about 31 cr. of equity. At the current price, the P/E valuation is about 15x.

Major Holders: Neither Foreign Institutional Investors nor any Domestic Institution holds a stake in the Company.

Risks:

Their revenue has currency fluctuations [since 50% revenue is realized from Exports]. Capacity which was not fully utilized has now been expanded. New capacity coming online will mean higher depreciation. The stock is listed on the BSE only, which means that there are higher surveillance checks and limits on how much the stock can move.

Lastly, there is very little volume on this stock of only 300 to 400 shares a day; and the market cap is a tiny 100 crore. So it comes with all the risks of small cap investing!

Future Outlook

A 2024 Forecast report on Empty Capsules Market (Gelatin, Non-Gelatin Capsules) states the market is expected to reach $2.57 billion [poised to grow at a CAGR of around 8.6% over the next decade] with factors such as increase in the geriatric population, proliferation of pharmaceutical, nutraceutical, and cosmeceutical industries, globally and the upsurge in the consumer preferences for capsules over tablets.

In 2015, the gelatin capsules segment accounted for the highest revenue of nearly $ 1.1 billion mainly contributed by the sufficient availability of gelatin for the production process and the cost-effectiveness of gelatin capsules as compared to non-gelatin capsules.

With a concentrated sector and expanded capacity, Sunil Healthcare is likely to see revenues and profits expand over time. The company has to see a growth in the overall sector and see its capacity utilization move fast to generate more profit. We cannot add this stock to Capitalmind Portfolios (it’s too small and not too liquid) but we would suggest that investors consider this stock for an appropriate entry as it grows.

We hope to have more such conversations around stocks. Please mention your ideas on Slack, and feedback about the post is much appreciated!

NOTE: Please do not consider this article as a recommendation, It is purely for informative purpose only. Authors may have positions in the stocks mentioned, so consider our analysis biased. There is no commercial relationship between Capitalmind and the companies mentioned in this analysis.

Foot Notes

The Premium Momentum Portfolio is at http://capitalmind.in/momentum-portfolio/

Our Premium Long Term Portfolio is at http://capitalmind.in/capital-mind-long-term-portfolio/

Note: This is not portfolio advice. Consider this a very risky portfolio and proceed at your own risk.

Holdings: Analyst and family do own some of the positions listed above. Please assume we are biased.

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