Nectar Life

Last time I had mentioned Nectar Life.

Here are the details for buy recommendation (This is from a fund house). I have bought some shares will buy more once more clarity emerges.

Nectar Life Science – Q2 FY 2007 results

Nectar Life Science is the second largest manufacturer of Cephalosporin (anti-infectives) bulk drugs / intermediates (after Aurobindo Pharma) for supply to domestic formulators and also exports currently to semi-regulated markets. Company has made foray into Phytochemicals (medicines based on herbs and plants) and has begun with Menthol.

Company has posted good results for Q2 FY 2007 with sales growing at 12% to Rs 89 crore. With change in product-mix by getting more into high-end Cephalosporin and taking advantage of higher prices of Menthol (both factors resulting in lower material / sales ratio), company has been able to expand OPM% from 8.6% to 15.2%, partly also due to lower other expenses.

Higher operating profit at Rs 18.61 crore (Rs 10.24 crore) has absorbed near doubling of interest cost to Rs 4.78 crore (Rs 2.53 crore) and increase in depreciation to Rs 2.14 crore (Rs 1.60 crore). Company’s debt has increased due to:

Ø On-going major capex plan of Rs 235 crore over next 2-3 years to part-fund Cephalosporin formulations and empty hard gelatin capsules plants coming up in tax haven Baddi - HP,

Ø Setting up plant II in Punjab mainly for exports

Ø Setting up R&D centre and Quality Control Lab in Punjab

Ø Higher working capital, mainly for menthol, as mentha oil for the entire year has to be procured in the season only.

Consequent to these factors, net profit after taxes has increased by 85% to Rs 10 crore. Company would make provision for deferred income tax in the year-end that should increase tax liability in Q4 FY 2007.

To part finance capex requirements, company had issued FCCB worth US $ 35 million (Rs 161 crore) in April 2006. The conversion price fixed initially of Rs 331.74 has been re-set to Rs 265.39. This would result in issuance of 60.7 lakh equity shares upon conversion (48.5 lakh shares at initial conversion price). Hence, fully diluted equity capital would become Rs 20.95 crore instead of Rs 19.74 crore.

Going ahead, company is expected to post decent growth in sales and profits from multiple streams of revenues and would also make foray into regulated markets, in which it has already filed DMFs. All the new plants being set up and existing plants would be made cGMP compliant and approvable by US-FDA.

At Rs 160/-, the share (Rs 10) is trading at 7.15 times fully diluted estimated FY 2007 EPS of Rs 22.36 and at 5.30 times fully diluted estimated FY 2008 EPS of Rs 30.17. We recommend a BUY as company would be growing earnings at CAGR of ~ 35-40% for the next few years, whereas it is trading at very compelling valuations as compared to peers. Company is in talks with a European pharma company for a strategic tie-up for contract research and manufacture (CRAM). If this materializes, it could act as a favourable trigger. Company would then have to set up a dedicated manufacturing facility for them