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Buy Arvind Ltd

Diversified revenue stream and one of the largest demin manufacturer in India.

Arvind Ltd is one largest denim manufacturer in India with a diversified revenue stream. The company has a presence in Denim manufacturing (~25% of total revenue in FY22), Woven division (~28% of total revenue), Garments segment (~19% of total revenue), Advanced Materials (~13% of total revenue), and other related segments. The company has a presence in domestic as well as export division. It has been consistently expanding its reach in the export business catering to requirements of large global brands and retailers.Arvind Ltd is one largest denim manufacturer in India with a diversified revenue stream. The company has a presence in Denim manufacturing (~25% of total revenue in FY22), Woven division (~28% of total revenue), Garments segment (~19% of total revenue), Advanced Materials (~13% of total revenue), and other related segments. The company has a presence in domestic as well as export division. It has been consistently expanding its reach in the export business catering to requirements of large global brands and retailers.

Upcoming Capex leading to increasing in capacity coupled with plans of repayment of long term debt.

Arvind Ltd has planned a capex of ~Rs.300 cr in FY23 and FY24 for its Textile and AMD division which is likely to generate higher revenues in the medium term. Further, the company has been focusing on reduction in debt levels. The long term debt was at Rs.1,018 cr as on 31 March 2020 has come down to Rs.757 cr as on 31 March 2022. Further, the company plans to monetize its non-core assets as well as plans to further reduce the debt levels in FY23 and FY24. This is likely to result in higher PAT levels owing to lower finance cost.

Increased impetus of growth from Advance Materials business

The Advance materials business is consistently growing at a CAGR of 17.5% YoY since FY19-FY22. The loss making division also turned profitable in FY19. In Q1FY23 advance materials business grew at a rate of -6.6% QoQ and -29.1% on a YoY basis. It has been guided by the management that the segment will grow at a rate of 25% to 30% through scaling up of mature product portfolio

OUTLOOK & VALUATION

Going forward, we believe the revival of the textile business after a likely short term impact in the export market and planned capex is likely to generate healthy revenues. Further, the management’s plan of reducing debt coupled with softening raw material prices is likely to have a positive impact on the profitability of the company. In addition to the textile business, advance materials business also provides strong growth prospects. Hence, we value the company at 6.5X its FY24 EPS and we arrive at a target price of Rs. 137 which makes it a BUY with an investment horizon of 18-24 Months, from the current levels of Rs. 97 it gives an upside of 42.0%.

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Buy Venus Remedies Ltd

New product launches and new vertical (Over the counter) to propel growth :

Off-patent pharma products lose value over the period due to the generic nature of the products. The competitiveness of the product is reduced over a period of time. To counter this, the company has modified its process of identifying the molecules by screening them through multiple filters like the complexity of the drug, market and the opportunity, competition etc. It aims to strengthen the product portfolio with the addition of 25 complex products, which are expected to be launched in the next 18-24 months. This process should not only drive the revenue but also should be margin accretive for the company.

The Over the counter market in pharma is expected to grow in the high teens over the next 3-4 years. Covid-19 pandemic has heightened the attention on health and nutrition, especially ensuring adequate immunity and energy levels to address current health concerns. The company launched its first product in the consumer healthcare space, R3SET – a Pain Management solution to capture the growth opportunity in the OTC space. R3set is a holistic pain management solution that ensures maximum efficacy and long term healing by combining essential oils with nanotechnology. It has fulfilled around 4,000 orders and has the aim to reach about 1lakh customers. The company has collaborated with expert physiotherapists and orthopaedicians to address lifestyle-related issues that gives rise to pain-related problems. It aims to introduce a range of disruptive products like gastroenterology, hygiene, stress management, vitamins, and supplements over the next 4-5 years.

Expansion of geographical footprint:

The international business primarily focuses on therapeutic segments such as Antibiotics, Anti-coagulant and Oncology. Exports contribute more than 70% of the total revenue of the company with a presence in over 80 countries with niche products like injectables for critical segments like antimicrobial resistance, oncology and anticoagulants. The company has consistently raised its dominance in the markets by securing government tenders with competitive bidding and also through marketing tie-ups with leading pharmaceutical companies globally. In FY21, despite the disruptions in logistics channels due to Covid globally, the company did manage to execute large export orders seamlessly by adopting a multi-modal strategy-air, sea and surface to transport the order. Going forward, it plans to expand its global presence to 100 countries and file new dossiers in key markets to achieve an overall turnover of Rs.1,000cr by FY25.

Investment in technology and supply chain to pay dividends:

Artificial intelligence is used to streamline the drug discovery process, faster production and reduce operational costs. This will enable the company to offer products at a lower cost. The company has launched a Business Intelligence tool, Tableau, which will make it easier for people to explore and manage data and take faster decisions. Also, the company identified the bottlenecks in the manufacturing process and has refurbished the facilities to improve the plant productivity. For a product, Enoxaparin, it installed a robotic line, thereby increasing the capacity by 4x while sustaining the product quality

Venus Remedies will continue to focus on R&D as a key growth enabler. Venus Medical Research Centre, R&D wing of the company, will continue to nurture intellectual property wealth by consistently developing novel products to address unmet medical needs, particularly in the Anti microbial resistance segment. It is developing a platform technology called Renal Guard which aims to significantly reduce the rapid deterioration in kidney function associated with the use of polymyxin antibiotics. Also, it is working on another platform technology to preserve last-line antibiotics called Stealth Targeted Nanoparticles (STN) to convert crucial IV-(for eg saline fluids) into oral form. This significantly reduces the cost of hospitalization by reducing the duration of the stay in the hospital and also reduces exposure to bacteria caused by the environment in the hospital.

The company has adopted a state of the art technology to expand the product reach to stockists and retailers directly, creating a unique marketplace, which will result in a supply chain similar to the Amazon model. This will significantly reduce the time taken to reach out to end consumers. It has developed product-specific machine-learning algorithms, which helped the company to understand the ecosystem of deliveries across India and globally.

One-time settlement of dues:

The company signed for a sale of a novel and patented anti-infective drug, Elores to Cipla Ltd in FY21. The deal includes the transfer of intellectual Property rights such as trademarks, design and know-how related to the brand. The funds from the deal were utilized to deleverage the balance sheet. As a result, the total debt outstanding for the company stands at Rs.43 cr in FY22 as compared to Rs.158 cr in FY20. This has improved the balance sheet significantly with interest coverage at 59x and Debt/Equity at comfortable levels of 0.1x in FY22

Outlook and Valuation

The company has paid up its dues and with a clean balance sheet and investments in R&D and new products, it is poised for the next phase of growth. With the strengthening of international presence and expansion of consumer healthcare, we forecast Venus Remedies revenue/PBT to grow at 16%/25% CAGR over FY22-24E. At the current market price, the stock is trading at an attractive level of 6.2x P/E on FY22 EPS. Going forward, we expect the company to deliver an EPS of Rs.37.1 in FY24; assigning a target multiple of 8.5x, we arrive at a target price of Rs.281 showcasing an upside potential of 41% from current levels with an investment horizon of 18-24 months.

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