Clinical growth

This is one stock I can bet not many (fresh or experienced) would have heard of. Poly Medicure (PM) is a small cap stock which came on my radar way back in 2007, when it was around 170. Since then, it has more than rewarded its shareholders with 2 1:1 bonus issues every 3 years in 2010 and 2013, and is now quoting at around 910. It has given a CAGR of 23% over the last 7 years, and that is without including the bonus issues. You can do the calculations for the rest. Even in the current year, it has returned 162% YTD. The promoters of this relatively unknown company are also the quiet Baid family holding about 48% stake. And none of the major institutions have discovered this yet.

One of the main reasons that attracted me to this scrip then was its miniscule equity capital of 5.5 cr. Post the bonus issues over the years, it still stands at a reasonable 22 cr. And the company has a market-cap of more than 2000 cr. On this tiny base, u can imagine the effect of any jump in profits has on its EPS and hence on the overall valuation. And the other reason for my interest was the company’s business.

Established in 1995, PM is one of the leading producers and exporters of medical disposables in India. The company is mainly into manufacturing and selling of healthcare disposables like Intravenous (IV) Cannula, blood bags, Blood Transfusion (BT) set and various other disposables. These products are widely used for infusion therapy, anesthesia, urology, gastroenterology, blood management, surgery & wound drainage and others. This is a niche business requiring a high degree of engineering and automation in manufacturing processes; need for continuous R&D and innovation; highly skilled workforce and technical knowhow, and long duration to get product approvals. So the entry barriers for new players are significant, and there are hardly any Indian companies that are in this field. A few major MNCs that I am aware of in this field include Siemens and J&J.

The medical disposable/equipment industry plays a crucial role in the healthcare system. Medical disposables have enhanced the ability of physicians to diagnose and treat diseases, improving overall health and quality of life. These technologies have changed the mainstream practice of medicine. These devices include not only diagnostic technology but also analytical techniques, providing physicians with fresh, accurate and rapid information. Also, minimally invasive technologies allow surgeries that are safer, with less pain and trauma, requiring significantly shorter hospital stays and hence are becoming increasingly popular leading to a higher demand for such products. And that is where PM would benefit.

In light of its widespread applications, the medical device market is witnessing explosive growth. As per a research report by Edelweiss, the global market for medical disposables is valued at ~USD 120bn, growing at 4% CAGR. This will continue to accelerate as demographics and market drivers increase their pressure for new and innovative product offerings at affordable pricing. The same report states that the Indian medical disposables market is pegged at USD 0.8bn and growing at a healthy pace of 17% CAGR for last 4 years. The domestic market is highly dominated by imports at 70% of the total demand. Out of the balance 30%, 18% of the medical disposables are produced by organized local players like PM while the remaining 12% is produced by unorganized players. The company exports about 75% of its products currently, so there is still a huge scope for market expansion for established players like PM.

PM exports its products mostly to Europe, Asia and South America and supplies to over 80 countries across the world. Exports contribute 70% of total revenue. Export sales are mostly via distributors. Domestic business is conducted via government tenders or via distributors to private hospitals. Recent management commentary indicates that the company is likely to focus more on Nephrology products (related to kidney ailments) in the coming period. Today, India imports most of the products including the basic ones in nephrology field. So there is a big opportunity for PM to make these products and bring in good, new technologies at affordable pricing.

Now the govt. has also approved FDI in medical devices which would directly benefit PM. Earlier, the medical devices industry was being clubbed with Pharma and hence approvals had to come thru the FIPB route which took anywhere from 6 months to 1 year. Now this barrier has been removed. Also with this new regulation in place, the medical devices segment will get separated from the drugs and pharma business which will help pricing.

PM has 3 operational facilities in the north – 2 in Faridabad near Delhi and 1 in Haridwar. And a 4^th one in Jaipur, in Mahindra SEZ, is yet to be commercially operational.

With the govt’s focus on Make-in-India, along with secular growth prospects for its products, and aided by INR deprecation (as 70% of its products are exported), PM appears to be in a sweet spot at the moment. Latch on to it for healthy returns over the coming years as has been its record.