SMRUTHI ORGANICS LTD - Turnaround Jackpot?

The Ace Investor

Smruthi Organics Ltd

  Listed on BSE: 590046
Currently trading around 150 with a market cap of around 50 crores.

Promoters hold 64.03% stake
Total Debt is around 40 crores, Total Reserves around 25 crores.

Smruthi Organics is a manufacturer and marketer of Active Pharma Ingredients (APIs).

Smruthi was established back in 1989.

Drug portfolio of the company includes: AMLODIPINE BESILATE,AMISULPRIDE,CARBIDOPA,CIPROFLOXACIN,DILOXANIDE FUROATE,FENOFIBRATE,METFORMIN HYDROCHLORIDE,NORFLOXACIN,PEFLOXACIN,TELMISARTAN,AMLODIPINE BASE,PHTHALOYL AMLODIPINE,S-AMLODIPINE BESILATE.

Smruthi is having two manufacturing units, both at Solapur, Maharashtra.

Smruthi is right now headed by Mr Purushotam Eaga.

 Lets take a look at Smruthi's financial snapshot since 2005

Smruthi had a consistent growth from FY05 to FY12, Sales from 31.44 crores increased to 200+ crores and Net Profit of 1 crore became 10.64, The EPS boomed to 27.33 but then the unforeseen struck.

Smruthi was working with the giants of Pharma industry and supplying to companies like Mylan. Post 2012, Things became bad for Smruthi when drug batches of Mylan and Merck were recalled and in 2013 FDA had already put a ban on Smruthi Organics to ship its products to the USA and the revenues came down from 200 crores to 90 and later 75 crores.

If that was not all, There started the Labour unrest at its facility which impacted it last year and further this year. As of now the labour problems are sorted as per exchange filing.

However, There are two key positive takeaways in this.

1) A company's turnover grows from 30 crores to 200 crores.

2) The company worked with the industry giants.

These two points give clarity about the management's capability of building their business well.

FDA issues are faced even by Sun Pharma and now its owned Ranbaxy among many other big pharma companies in India. If resolved Smruthi can do wonders.

At present, Smruthi has taken the alternative measures.

Till it solves its issues with the FDA and the EU regulators the company has started exporting to other regions and markets.

Smruthi has stated in its latest Annual report that they have built a team to target unexplored markets of S.E Asia, Middle East, Latin America, and Africa.

It also states that the company has in the later part of FY15 stopped the manufacturing of low margin products and increased its focus on the high margin products.

Another thing mentioned in the AR is that the company is going to launch new products to expand its margins.

Recent financial performance of Smruthi looks attractive: After constant losses suddenly in March 2015 quarter company reported Sales of around 25 crores up from 12 crores QoQ and a Profit of 3.53 crores which included tax credit of 1.76 crores as against a loss of 2.63 crores QOQ, EPS soared to 9.69.

In the latest June 2015 quarter, While being hurt by another labour strike Smruthi managed about 17 crores as revenue and almost at break-even technically it reported loss of 15 lacs.

If we see what has changed financially, We will notice that the Operating Profit Margin of Smruthi which used to be around -4% or at +1 to +4% has consistently in the last two quarters been around 14%. Which means what was stated in AR is just not stated for the sake of it.

Here is a quick last four quarters snapshot for Smruthi.

From the above facts, We can easily smell a turn-around.

The AR also states that the company is closely working with FDA and EU authorities to resolve the issues at earliest and restart its exports.

Friends, The pharma sector is in such a bull market that on expectations of a turn around.

Jubilant Life rallied from 100 to 400 in no time and is sustaining there and only now a turn-around became visible there.

Let us assume the best case scenario, If we have any consistent four quarters like the March-15 quarter the annual EPS will come at 38.76, What if we assign a 20 times rating to that?

775 is the price we get.

Smruthi is a turnaround play and would require patience, However i see the management moving in the right direction and having built this company from a micro to a respectable enough entity to deal with industry giants. They (the management) are too smart to be ignored.

Recently the stock price has witnessed good action, And i think some smart investor apart from us is slowly buying the shares of this company.

Smruthi Organics matches all criteria of a perfect turn-around candidate as posted on the blog earlier (Link: Turnaround Stocks: U-Turn to High Returns)

 All in all, Smruthi Organics Ltd looks like a good pick for the portfolio.

Technically: it is looking really bullish, May flare up to a lot higher levels very easily before it starts reporting profits.

Note: The above is not a research report but information as available on public domain and it should not be treated as a research report.

Registration status with SEBI: I am not registered with SEBI under the (Research Analyst) regulations 2014 and as per clarifications provided by SEBI: “Any person who makes recommendation or offers an opinion concerning securities or public offers only through public media is not required to obtain registration as research analyst under RA Regulations”

Disclosure: It is safe to assume that i might have Smruthi Organics Ltd in my portfolio and hence my point of view can be biased. Readers should consult their financial advisory before any investments.

:Links:

Smruthi Website

Smruthi Screener

Smruthi Annual Report 2015

Smruthi Mylan Merck business link

2013 Smruthi Fda News