Saturday, 19 September 2015

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:

101 comments:

  1. Sir ur view on orchid pharma,wanbury
    Are these companies also turn around stories

    ReplyDelete
    Replies
    1. Wanbury promoters have pledged their holdings and it already is at 130 crore market cap.

      Orchid Chemicals again promoters have pledged their holdings and it is trading at a market cap of 500 crore and financials haven't hinted any improvement yet.

      Delete
  2. Hello sir,

    You were very bullish on Richa industries. Why is it struggling so much even after posting decent results? It is one of the worst performing stocks in last 6 months.

    Regards,
    Jay

    ReplyDelete
    Replies
    1. Hi jay, I think the debt burden on the company and no clarity about how they are getting rid of the same is taking a toll on the stock.

      When it went up it was because that the company was looking to sell its textile unit to do away with the debt but no fresh updates about the same have come from the company which means either company scrapped the plan or maybe they were not able to sell it.

      I think Richa at current level has extremely low downsize risks as it looks like that the business is going to be good for them so the poor rating can only be improved from here.

      Delete
  3. Gr8 pick after long time ,hope everythg is fine . Pharma companies have always out performed in the market :-)

    ReplyDelete
  4. finally a new pick from you after a longg time... now thats what we call a gem...i think the biggest plus point is that the stock is from pharma sector... great pick sir!

    ReplyDelete
  5. Dear Ace Investor, i have read your above report on Smruthi Org. It's looking like a value pick of pharma stock and hopefully it will give multiple returns if everything goes well as per planning of management. This stock has a potential to give returns like Marksans Pharma, Mangalam Drugs, Jub. Life etc. Very nice pick. All the very best.....

    ReplyDelete
  6. Thank u sir.. currently inveated in waterbase.. now will have to cater money to invest in this new gem...

    ReplyDelete
    Replies
    1. Is waterbase a better buy at cmp than avanti feeds cmp levels and if yes, what should be the targets in 3-6 mos hold??

      Delete
  7. How do you see the prospects of Deccan gold & delta corp for long term?

    ReplyDelete
    Replies
    1. Both are termed as jackpot calls since early 2000s and both have done nothing wonderful.

      Delete
  8. sir, it is reported by u that there is strick. whether strike is call off or still the plant at sholapur is closed. pl enquiry with the best sources if available to u and pl inform to all the boarders tq

    ReplyDelete
  9. many shares that consistently deliver profits and divident paying, instead of it y would u recommend this loss making company?

    ReplyDelete
    Replies
    1. Have never posted about a loss making company in the past, if i have posted this time there is a reason and the reason is explained above. This can be a big wealth creator and i mince no words.

      Delete
  10. hello sir,
    As smurthi is working is API segment as its a low margin segment so commands less P/E.As per my limited understanding it is quite optimistic to assume 20 P/E.

    Thanks.

    ReplyDelete
    Replies
    1. Our another API sector blog post NGL Fine chem already trading around 15 p/e friend

      Delete
  11. why ur recommendation has come when its nearing 52 week high? what abt the poor investors who struck in richa industries? any explanation on this? btw, i am not against to ur recommendation...!

    ReplyDelete
    Replies
    1. Why my post can not come near 52 week high? Should i ask you Mr Anonymous before posting anything?

      Regarding poor investors, check this my friend: http://theaceinvestor.blogspot.in/2015/09/review-10.html

      Delete
    2. Your reply is obnoxious and stinks of arrogance. Dont forget your exiatence is prett much dependent of these poor fellows aka as blind followers of 'the ace investor'

      On this specific recommendation - your basic premise of potential price of arnd 800 is completely flawed. I would have thought you have the Common sense that tax credits ( which march quarter has) are never recurring and if i exclude this ( correctly) your fancy 800levels crumble to 375-400/-

      So just watch your recommendations

      Delete
    3. I am a straight forward guy and that might be arrogance for you but that's me..
      Anyway, Its funny that you think my existence is due to this blog and will vanish if i stop writing.

      Coming to the specific recommendation, I hope you have read the full post since i already mentioned it is a non recurring tax-credit, And the fancy 800 level is a mere assumption of good business from the company however in reality it can go much higher because the Profit must not remain at that level as the sector has huge scope of growth.

      So just watch your nonsense that you spread here.

      Delete
  12. Dear Ace,

    I read your comment on Richa above and I think you are right.

    But one big positive which I see is reducing steel prices because of global concerns which should ease of the raw material cost and add to the margins of Richa.

    I think with strong order book and guided 50% topline growth company should clock strong cashflows which can pair down debt to considerable extent.

    What are your thoughts about this?

    Regards

    CA Sushil

    ReplyDelete
    Replies
    1. Absolutely no doubt, once that happens rating will definitely improve.

      NSE listing also a trigger but haven't heard about it again from the company.

      Delete
    2. Dear Ace,
      What are your views on Sunteck Realty in the realty space, with expected rate cuts, it will improve from here and is it better to switch to Anantraj from here??Does promoter have any pledge of shares or any issues with their land banks, if any??

      Delete
    3. Dear Ace,

      Please advise or review and post ur reply on Venus Remedies. Is it better buy than the recommended smruthi? Appreciate ur views on it also pls...

      Rgds,
      Shaik

      Delete
    4. Regarding Sunteck: As it follows project completion method the numbers are yet to hit the sheets so i will obviously wait for the numbers in the long-term and hold, The have a good lank-bank in Mumbai and are backed by good guys like Ajay Piramal.

      As for Anantraj, I am not closely tracking it and nor do i have a clue about their land bank so tough to comment regarding the same.

      Delete
    5. @Shail: I think the pledged shareholding of almost 98% is the issue in Venus Remedies and to add to that the equity is also very high.

      If we directly compare Smruthi and Venus plz notice one thing.

      Smruthi had a good time from from FY05 till FY12.
      From FY12 to FY15 Smruthi had a tough time.

      Whereas Venus had a good time from FY05 to FY14 and FY15 was tough for it.

      This may well be a start of bad times for Venus while This may well be end of bad times for Smruthi.

      So which one makes more investment sense?

      Delete
    6. Thanks for ur valuable inputs with direct comparisons of both pharma stocks ace. appreciate ur efforts and honest comments on these two stocks...

      Delete
    7. thanks for ur comments on sunteck realty.

      Delete
  13. Ace sir, your views on camlin fine sciences, indraprasht hospitals and alembic limited pls

    ReplyDelete
    Replies
    1. Not tracking Camlin and Alembic, Indraprastha Medical Corporation is what you mean i guess is a good company and a good stock for patient investors.

      Delete
  14. Hi Ace Sir,

    Thanks for above recommendation.. that looks really attractive. I am stuck with a big amount in Bhageria Dye Chem.. at 160 levels.. Can you provide your view on this stock..Your response will be really appreciated..

    Thanks
    Krish

    ReplyDelete
    Replies
    1. Bhageria Dye-Chem is in the business of textile dyes, There are a lot of companies listed in this sector as well as the competition from China is affecting it.

      This sector was seeing a lot of buying interest in the past but due to the competition i avoided it and instead went into niche sector like food dyes (Dynemic, Vidhi).. While VIDHI has done amazingly well, Dynemic has been lagging.

      I think the whole sector of textile dyes is rated poorly hence much can't be expected from it.

      Delete
  15. Thanks for the quick response..! So any suggestions for me as i already have a big amount in it.

    ReplyDelete
    Replies
    1. If it goes up in speculation exiting out of it would be good.

      Take this as a lesson learnt and now onwards Think Before Investing rather than Thinking after Investing.

      Delete
  16. Dear Ace,

    Ur views on Saurashtra Cement would be appreciated... Is this also a turnaround story and if yes, upto what levels it can go in your view??

    Awaiting for your valuable inputs on the same...

    Rgds,
    Shaik

    ReplyDelete
    Replies
    1. 75% of the promoter stake, or 48% of the total equity of the company is pledged in Saurashtra Cements.

      Delete
    2. Dear Ace,

      Thanks for ur advise on saurashtra. Will exit it. Pls suggest any two strong moat co buys that can be held for 4-8 yrs (long term growth cos) without tracking them regularly and the expected return targets after such long periods of investment
      Appreciate your views.

      Rgds,
      Shaik

      Delete
    3. Moat, well pure moat company out there can be info-edge India, another one posted on blog Talwalkars does have a sort of Moat story. If we see Inox that too is almost one moat play.

      Delete
    4. Dear Ace,
      Thanks. Will invest in SIP (over few mos) in these stocks.

      Rgds,
      Shaik

      Delete
  17. Ace,

    Can you detail ur views on mindteck or provide me link to ur recommendation of this stock. Also, its mgmt quality and owners and promoter quality and profitability/debts, pledging levels, etc.... Do you think its still a good or multibagger buy at cmp??

    Rgds,
    Shaik

    ReplyDelete
    Replies
    1. My post on mindteck can be found here: http://theaceinvestor.blogspot.in/2014/12/value-pick-mindteck-india-ltd.html

      Delete
  18. thanks. However, Just one update to you on Mindteck, it is still held by the same promoters, i.e. Embtech Holdings Limited as per its last Annual Report and not changed or sold to any firm (though need to check or know the ownership of Embtech Holdings Limited itself). Do you still think a good or multibagger buy? I think the promoters are same for the last 1 to 1.5 decades and during this time, the co has badly performed despite being in the high growth business of IT which other cos did and hence speaks low of management quality or sustainability of revenues to me. Unless u have info about its solid growth and revenue plans, i feel not to average or buy more of this stock presently. Appreciate your views and advise. Also, pls advise any two good fundamentally very strong moat co that can be held for next 4-8 years without looking or tracking them for this period (for long term investment, of course capital protection is utmost and the minimum basic expected from the investment). Awaiting ur reply on mindteck as well as on any two strong recommendations.
    Rgds
    Shaik

    ReplyDelete
    Replies
    1. Read my post again i have used words mamagememt change and not promoter of mindteck (Yusuf lanewala currently is the chief) he is not there from 1 decade.

      Delete
  19. Ace,
    Ok. Thks. Would you recommend mindteck buy at cmp? Also, pls advise any two good fundamentally very strong moat cos that can be held for next 4-8 yrs without looking or tracking them...Appreciate ur advise..

    Rgds,
    Shaik

    ReplyDelete
  20. Is waterbase a better buy at cmp than avanti feeds cmp levels and if yes, what should be the targets in 3-6 mos hold??

    ReplyDelete
    Replies
    1. Waterbase has appreciated 100% from the price when discussed on blog, pinnae feeds merger is the positive factor which can help it grow like avanti.

      Delete
    2. Sir want to invest in FCS Software for 10 yrs horizon.. maine toh research kar liya lekin aap v thoda dekh k batao na sir...

      Delete
  21. thanks ace bought it.
    this is the first time you have posted an turnaround stock.. all your stocks have given good returns but they
    were profit making companies.

    i hope people realize this is a turnaround stock and it needs patience.

    ReplyDelete
  22. very difficult to buy this due to low volume and low equity the brokers have brokerwise limit so cannot buy online have to call and they will place order from bse bolt which might not even reflect on trading screen.
    maybe it can go upper circuit constant

    ReplyDelete
  23. Hi Ace,

    Glad that you came back and being regular with updates. And thanx for your new pick (Smruthi). I know, you have already told me that you are not tracking HFCL, but little curious to ask you to focus on it and let me know your valuable advise as I am with huge loss and stuck to it since 2008... I would like to average Richa (my avg value 31.9) as it is running now in 21-22 range... If I come out of HFCL, would it be advisable to invest on Richa? or Dynamic? or Smurthi? Awating for your favorable reply..
    Regards,
    Dharu

    ReplyDelete
    Replies
    1. I am not aware about HFCL at all hence i cannot comment on it, As for averaging Richa.

      I think rather than increasing exposure to Richa you should keep what you have (If money is going to be made it will be made on the ones bought at 31.90)

      Dynemic has been trading cheap and looks good, Smruthi the whole story is posted above.

      Delete
    2. thank you Ace... I will wait till 30th Sep as AGM for HFCL. After that I will take a strong decision....... My heartfelt thanks to you for the picks Vidhi, Waterbase, dynamic and ofcourse richa ....

      Delete
  24. hi sir, what is your opinion about sudar industries at cmp

    ReplyDelete
    Replies
    1. Significant promoter holding of Sudar is pledged.

      Delete
  25. Hello prem sir


    Pl share your views about Hindustan tin works. It is falling down from 10level and now trading at 52. I am holding it @85.

    Thanks

    ReplyDelete
    Replies
    1. Even though i do not track it closely, I think it is one of the cheapest stock available in the packaging sector.

      Delete
  26. Your post is very helpful for me....
    thanks

    ReplyDelete
  27. Hi
    U r from Kolkata...Pincon spirit is also based in Kolkata....have u ever meet Pincon Management, their office, factories etc?...do u belive d management absolutely? ..how do u rate their corporate governance? ...plz rply

    ReplyDelete
    Replies
    1. If i had met them i would have surely posted detailed note about management meet.

      I do not believe the management absolutely, But i do believe the numbers should be true.

      I think the stock's performance has been good.

      Delete
  28. Ace
    M also from kolkata...seeing Pincon is advertising hugely to build a strong brand...their advertising is seen in every newspaper, events etc...good to c...recently announced bonus too...but do u feel dat paying dividend would b much better step to build confidence among the investors as there is a general feeling of suspicion about d promoters.What is ur view in this regard?

    ReplyDelete
    Replies
    1. Without a doubt dividend would be better, As you are seeing in Kolkata i think many have not noticed that Pincon Spirit is constantly running the ad on ET NOW, Highland Blue package drinking water starring Armaan Jain who is the cousin brother of Ranbir Kapoor.

      Highland blue also happens to be the whisky brand of Pincon.

      Delete
  29. Hi Ace,
    We will be really thankful , if you can put some time for reading this post and educate us.

    I have been learning the equity investment process for quite some time now. Had my fair share of mistakes like getting into value traps in search of value. Later on learnt a better method of screening by selecting stocks in which MF has started putting their money(recent buying). I have been able to find some multibaggers but I was never able enter when the company fortunes are changing. I entered late When stocks when they are in news after they appreciated 4-5 times. So eventually my returns are like 2-3 times over a longer term from my purchase prices.
    I want to learn the process of selecting companies/businesses when their fortunes are changing, the way you do it perfectly.It is very difficult to find them as nothing is right in those companies and betting on future prospects.

    What kind of filters do you use to filter out these kind of companies. Do you use some screeners (Volume/price) and then dig into them or Something else ?

    Secondly, How do you check the quality of management? As I am working, So i can’t go and meet company managements.

    Thanks and Regards,
    Vinay

    ReplyDelete
    Replies
    1. I am still learning Vinay to be frank.

      Even i can't go and meet company managements, here in Smruthi the management is very difficult to access.

      What i found about Smruthi good was, They never raised their debt aggressively even during growth period, They constructed good business relation with top pharma companies in the world only to be spoiled by their mistakes in how seriously they take the FDA.

      They are trying, their efforts can be seen on how the quarterly results have shown good operating profit margins... There are high chances of them to succeed because of their track experience of building this company.

      To spot a turnaround the earnings first should show improvement, and secondly the management should have a good record, like Smruthi was even paying good dividends.

      Delete
  30. Thanks Ace.
    Learning is process. I hope I will catch up.

    ReplyDelete
  31. Hi ace,
    Can subex be a multibagger in 10yrs considering the mgt team or will FCCB conversion affect it?

    ReplyDelete
    Replies
    1. Nothing to comment on Subex as of now.

      Delete
  32. Hi ace , if a bonus share is issued at 1:1 then eps will be diluted by50%..so eps of 18 will become 9...den the market price will also adjust accordingly. .say from 200 rs to 100... then what is the advantage of issuing bonus share. .. Regards. .

    ReplyDelete
    Replies
    1. Main advantage will be liquidity, Which will increase the trading and help it come at par in terms of valuations.

      Delete
  33. Hi, ur view on Super Tannery, Veer energy, and syncom formulations?

    ReplyDelete
    Replies
    1. No idea on syncom and veer.

      Super Tannery, not a good idea to invest in companies such as this which is into cow leather and buffalo leather.

      Delete
  34. Dear Ace

    could you please suggest about the Treehouse education prosepcts, shaii we conisder as moat company?
    The scrip price dropped from 540 to 300? Is it value buy at CMP
    looking for your advise

    ReplyDelete
    Replies
    1. It has moat but trade receivable issues took it down, Not such a bad idea to buy small quantities.

      Delete
  35. Hi sir, ur view on Jasch industries?

    ReplyDelete
  36. Sir,ur view on sudarshan chemicals?is it value buy at CMP?

    ReplyDelete
  37. Hi Sirji,

    Request you to share your views on following script. Not requesting for spoon feeding but it will be great if you can share your experienced views on the same.

    Script : Incap ltd
    Market Cap : 12.52 Cr.
    Current Price: 25
    Face Value: 10.00
    P/E: 4.64

    Promoter stake is increased and paying dividend. As per my understanding they maintain good balance sheet also. ( i have very minimal knowledge, correct me if am wrong)

    As i did the basic research, it seems that it has lot of potential and to be a good bet for long term investor.

    But it would be very helpful if you can share your views on the same.

    Regards,
    SP Bangalore

    ReplyDelete
    Replies
    1. Decent, but do look at Surya Roshni, better bet!

      Delete
  38. Borosil glass getting delisted ?

    ReplyDelete
  39. Found two listed companies operating e-comm in india...
    First one is nihar info global promoter holding 65% market cap 10crore only banyanstore.com
    Second one is palred tech 46% promoter holding market cap 50 crore only latestone.com
    Both good companies buy asap....

    ReplyDelete
    Replies
    1. :) Palred posted on this blog when it was trading at 21 rupees.

      Delete
  40. Two companies nihar info and palred tech e-comm online

    ReplyDelete
  41. Both in india website owners....banyanstore.com and latestone.com.....

    ReplyDelete
  42. Sir please your view upon Pantaloon fashion ,unity infra and Cosmo films

    ReplyDelete
  43. Sir please your view upon orient green power

    ReplyDelete
    Replies
    1. Not closely tracking Orient green power,unity infra and cosmo.
      Positive on Pantaloons

      Delete
  44. Today in kolkata, surprised to c d advertisement in 2 front page of d newspaper 'Eisamay' by Pincon Spirit...they r really trying to build a strong brand...they r also giving adds of musterd oil, vegetable oil etc ....is there any official update about their investment in these fields too?

    ReplyDelete
  45. Sir your view of recent account ment by Palred to go for preferential allotment.

    They have just cone Capital reduction and now going for preferential allotment. can u find any logic in the same.

    ReplyDelete
    Replies
    1. Lets see who are they going to allot to :)

      Delete
  46. Thanks for ur reply sir I have orchid chemical and I want to buy now necter or tridant sir please your view upon these stocks

    ReplyDelete
  47. Ace sir what is ur view on mrpl in 6 month horizon

    ReplyDelete
  48. Dear Ace, I am new investor and want to know whether i can enter this stock now ?

    ReplyDelete
  49. Hi Ace

    I read about your post recently and quite impressed. You are getting bad comments but ppl should understand that hit ratio in small caps is low and you have a good hit ratio. somebody taking only 1-2 bets of your and exp. failure is their fault.

    I wanted to point out in case of Smruthi is that even Sept-15 qtrs results are not that good and the OPM of 14% looks difficult for the year. The Mar-15 qtr was itself good due to saving in tax which means that Mar-15 OPM is also not 14%.

    I am going to read the AR soon but the questions in my mind after reading your post are
    - What the potential of new products?
    - Why will company succeed in new markets? What are the steps and strategy laid out?

    Thanks
    GreyCells

    ReplyDelete
  50. Dear sir

    Ur view on icra??? If u tracking this company.
    Thanks
    Rajesh khosla

    ReplyDelete
  51. Dear Sir,

    Any fresh view on Smruthi org after quarter result?? It has came down a lot. Should I hold? pl let me know..

    Rgds,
    Satyajit

    ReplyDelete
    Replies
    1. Loss is narrowing, Turnaround is a time consuming process.

      Delete