Nectar Lifesciences (Nectar) is amongst the fastest growing Indian pharma companies with a revenue and PAT CAGR of 40% and 52% respectively over FY04–FY08, achieved purely through organic means.
It has strong presence in the third and fourth generation cephalosporin space and in phytochemicals and is venturing into gelatine capsule manufacture and CRAMS to de-risk the business model.
The company has presence across the entire value chain from intermediates, APIs and formulations to capsule manufacturing, thus emerging as a strong integrated player with an advantage over other API and contract manufacturing companies.
China is currently the chief source of intermediates and APIs for major pharma companies. However, there has been an acute shortage of imported APIs from China due to stringent government norms and reduction in subsidies. This is likely to shift some demand to India, which Nectar can tap into.
Going forward, net profit margin should improve from 10.1% to ~14% with a planned entry into regulated markets by 2010. The company is also looking to acquire an anti-infective company in the US or Europe, thereby reducing the entry time to these geographies.
Concerns and valuation
Nectar has excessive dependence on key geographies, especially China, for phytochemicals. A slowdown can negatively impact sales. A delay in getting regulatory approvals for regulated markets is also a cause for concern.
The stock at current levels is trading at 4.9x FY09E FDEPS of Rs55.8 and 3.4x FY10E FDEPS of Rs81.1.
Based on its strong growth prospects, leadership in key verticals and transitioning up the high margin value chain, we value the company at 6x FY10E earnings and recommend a BUY with a target price Rs503.