Founded in 1987, Fredun Pharmaceuticals Ltd (BSE: 539730) manufactures and markets pharmaceutical formulations in India and abroad. They offer products in various categories including diabetes, cardiovascular disorders and nonsteroidal anti-inflammatory drugs (NSAIDs).

The company in its endeavour to move ahead has now ventured into manufacturing of dietary /herbal supplements, nutraceuticals, and other healthcare products along with animal healthcare products also through its group Companies Fredun Healthcare Pvt. Ltd. & Fredna Entereprises. Fredna Enterprises is the largest manufacturer of Microcrystalline Hydroxyapatite Complex (MCHC) in India. MCHC is a natural source of calcium used for formulations for both humans and animals.

India is home to one of the largest numbers of diabetes patients in the world at over 70 million, while heart diseases are known to be one of the biggest causes of death in the country. Cardiac and diabetes drugs are under-penetrated therapy areas, and are expected to grow at a faster pace compared to the other segments.

The company follows a similar strategy of other smaller pharma companies by focussing on developing bio-similar and registering just out of patent drugs in developing markets by cheaper and quicker In-house manufacturing process.

The company received its WHO certification in 1996 and started exporting products in the same year.

The company started out as a contract manufacturer to big Pharma companies. Currently contract manufacturing is only 2% of its total turnover. The company has the right mix of value and high-volume products.

Product portfolio has expanded from having around 63 products in 2007 to 427 products in 2019. The company is registering its products in various countries and over 200 products due for registration within the next 18-24 months. They have also forayed into ointments & pellets categories and specialised products for bone grafting.

The company has expanded the production capacity by 530% in the last few years. They have been systematically investing in its productive infrastructure by installing additional granulation departments, high speed tableting and blister packing machines.

The company considers Africa, Sri Lanka and Russia to be huge potential markets that can lead to future revenue growth.

Roughly 20 percent of India’s pharma exports of around USD 17 billion go to African countries; making these countries a launchpad in the international strategies of a significant number of Indian exporters. This aspect gained a higher significance as Indian companies have steadily established themselves as partners of choice of international healthcare NGOs and aid agencies over the past decades.

As per management’s recent commitment to an ace investor:

• The current sales mix is Anti-Diabetic contributes 25%, Anti Cardiac-18%, NSAID 24% and Others -33%.
• The company is targeting sales of INR 120 Cr. in FY20 and INR 150 Cr. FY21.
• Going forward in the next 2-3 years, the company expected to do a business of around INR 60 Cr. alone from Ointments and pellets. Most product developments are in the final stages. Current order book in hand is INR 45 Cr.
• The focus of the next 2-3 years will be on marketing/registering the products.
• The current capacity utilisation is at 50% and by mid-2020, the utilisation levels are expected to go up to 80%.
• The company has enough capacity to deliver INR 230 Cr. of sales so for the next two-three years. No further expansion is expected in the coming years.
• Company is having no concerns regarding Africa client payments or bad debtors. Company deals with parties which are largest or second largest in their respective countries.
• The recent 4% pledging was for secured loan collateral and the company has no plans of pledging more shares.

Operational and Financial Performance

	Mar-10	Mar-11	Mar-12	Mar-13	Mar-14	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19
Sales INR Cr.	5	8	12	15	21	25	42	57	60	97
% Growth YOY		68%	47%	29%	41%	19%	67%	34%	5%	63%
Operating Profit Margin (%)	9%	10%	3%	9%	7%	7%	9%	6%	10%	11%
% Growth YOY		69%	-61%	373%	1%	16%	136%	-15%	72%	79%
Net Profit Margin (%)	3%	0%	-2%	0%	1%	1%	3%	3%	3%	5%
% Growth YOY		-87%	-1250%	-104%	2300%	4%	328%	33%	23%	155%
EPS	1	0	-1	0	1	1	5	6	5	11
% Growth YOY		-87%	-1250%	-104%	2300%	5%	328%	33%	-15%	119%

• The total sales have grown at a CAGR of 39.8% over the past 10 years.
• Over the same period, operating profit and net profit grew at a CAGR of 41.5% and 45.8% respectively.
• Raw material costs as a percentage of sales has increased from 41% in FY10 to 68% in FY19.
• Earnings per share has grown at a CAGR of 37.6% from FY10 to FY19.

	Mar-10	Mar-11	Mar-12	Mar-13	Mar-14	Mar-15	Mar-16	Mar-17	Mar-18	Mar-19
Debtor Days	91	56	52	47	59	75	98	131	94	67
Inventory Turnover	4	6	4	5	6	6	4	8	3	2
Fixed Asset Turnover	1	2	2	3	3	3	3	3	4	3
Debt/Equity	1	2	2	2	3	3	4	4	0	0
Interest Coverage	1	1	1	1	2	1	2	2	2	3
RoE (%)	5%	1%	-10%	0%	9%	9%	29%	30%	8%	11%
RoCE (%)	9%	10%	9%	13%	13%	13%	20%	18%	14%	19%

• The company has zero long-term debt.
• Debtor days has reduced from 94 to 67 days in FY19. Total receivables as on March 31, 2019 stood at INR 18 Cr. against sales of INR 97 Cr.
• The inventory of the company has increased from INR 18 Cr. to INR 41 Cr. and is likely to increase going forward.

Promoters collectively hold 52.04% of the company. As on December 2019, R&D expenses stood at INR 40 Lakhs.

The company clearly has transformed from being a job-work convertor to a company bringing latest molecules for exports. Direct compressible granules capacity is over 12 metric tonnes per day. Current manufacturing capacity is approximately 22 million tablets per day, 2 million capsules per day, 53,000 bottles per day and 290,000 tubes per day.

The company has a good story in place but meaningful numbers are yet to come. For a long-term investor, this company provides an opportunity to bet on the disruption in the field of branded medicine. Fredun Pharmaceuticals is currently available at a CMP of INR 179.70 (as on April 24, 2020) and at a PE of 22.09.

Team 3C Capitals

Sources

• Value Research Online
• Annual Reports
• Blogs