GTS 2 ANSWER - SEQUENT SCIENTIFIC LTD.

 

Sequent Scientific is a pharmaceutical company owned by the same promoters of Strides Arcolab Ltd ( STAR).It is both in Animal Health and Human health Products - manufacturing Active Pharmaceutical Ingredients(API’s),Contract Research and Manufacturing Services(CRAMS) and also producing Specialty Chemicals.Company is the world’s largest producer of Veterinary Anthelmintic API’s and having strong alliances with Orffa B.V, which is amongst the world's largest veterinary pharmaceutical marketing companies. In human health category ,It is one of the largest supplier of Anti- Malerial API’s to CIPLA .Sequent having  700+ employees and 5 manufacturing facilities located at Tarapur,Mangalore,Panoli,Mahad and Ambernath.Its R&D centers are located at Bangalore and Mangalore with more than 120 scientists.In the human health segment , company’s products includes Albendazole,Ramipril,Artemether,Tenofovir,Glychocilic Acid,Artesunate..etc..More than 10 new API’s are in development stage like Bromfenac Sodium,Valporic Acid,Labetalol HCI..etc. In veterinary API division sequent manufacturing more than 20 products and many new under various stages of development.Company also producing many formulations under its own brand name for vetenary segment. As on March 2012 , company filed 33 Drug Master Files (DMF) and another 22 is under progressing .

After taken over by the promoters of Strides Arcolab in 2007,its turnover moved from Rs.68 Cr to Rs.335 Cr in just five years through organic and inorganic route. As on March 31, 2012, Sequent having  six subsidiaries and three step-down subsidiaries .Now , company is taking many steps to move into the big league. A multi faced strategy is in place and company is at various stages of implementing the same .Recently company completed its expansion at its Mangalore unit for human API’s .Expansion of its specialty chemical division also completed and its fruits are expected from the second half of the current financial year onwards.In FY 2011-12 ,company reported a sales growth of 18 % in specialty chemicals division and this year company will start exporting from this division . Last year company  also decided to enter into new sectors includes  Penems, Penicillin,Oncology and Phyto Pharmaceutical/Herbal Extracts  with a total capital expenditure of  Rs.164 Cr. Funding for  this capex will be through debt and internal accruals and the financial closure also completed. Its new USFDA standard facility at Panoli is expected  to contribute from the next FY .SSL has started implementing the Penems project  under its 84% subsidiary M/s. Sequent Penems Private Limited .The first phase of  this greenfield project will be fully operational by  the end of this FY. 

Through its another subsidiary Elysian Life Sciences (Mauritius) Limited,company started the cultivation of Artemisinin plant  in Africa.Leaf of Artemisinin is the key raw material for one of its best selling anti-malerial human API’s  ‘ Artemether’ . ‘Artemether’  is contributing almost 35 % of company’s revenue .Till now Artemisinin  leaf is  imported from China and Vietnam. So this backward integration will surely improve its margins going forward. These are some of the exciting facts about the company which will bring benefit in next few years .

Financials.

FY 2011-12 was an unfortunate year for Sequent .There were two accidents in two of their factories which took the life of few employees and resulted in production stoppage for many months. In September 2011 ,there was a gas leak incident at its Tarapur unit which took the life of 4 employees.  On February 03, 2012 a fire broke out in its existing Panoli facility which disrupt the production for many months.Now the company strengthened the safety standards  and just came back to the normal production schedule.As a result of these one off events ,its net profit nosedives from Rs.16 Cr to just Rs.1.5 Cr in last FY.In the latest  June quarter too it posted a loss of Rs.15 Cr .Out of this Rs.15 crore loss about Rs.13 Cr is due to foreign currency transactions.I believe ,going forward company will implement a proper hedging mechanism to minimize this risk. In my opinion there is no meaning in analyzing this company based on its past performance .The good days are just ahead as in the case of Granules India.

Some observations

I believe this is one of the very few listed pharma companies of its size remains  least researched by equity analysts and  investor fraternity .Even now, many investors are  not aware this company is a pharma company and it is owned by the same promoters of Strides Arcolab.You may wonder why this stock hits its 52 week high price even after reporting a huge loss of 15 Cr in first quarter !.In my view  there is a reason for this - even if this company having an equity base of Rs.22 Cr , all these shares are held by just 2000 share holders.Promoters are holding 56% and another 32% by HNI’s and other corporate entities.A close look on its recent share holding pattern indicating the signs of an accumulation in this stock .Normally such a trend is visible when the insiders having some positive information which is not available in public domain. While reducing their stake in the other listed company Strides Arcolab, promoters are also  hiking their stake in this company even through  open market  purchases.Due to the accumulation/cornering  of these informed sources its share price is ruling at higher level even after dismal performance in recent past.In addition to open market purchases, now the promoters are subscribing  21,00,000 warrants on a preferential basis. Two promoter group entities Agnus Capital LLP and Chayadeep Ventures LLP will subscribe 4.37 percentage each  which will take the total promoter share holding from 55.8 % to 60.47 % .

Conclusion

Now  company is going through a transformation phase  .It is now concentrating and paying much attention to high value niche human API’s and veterinary formulations.After about 5 years of acquisition, promoters are now willing to invest heavily in this company .Being the promoters of Strides,they have good experience in this field and good connections with foreign marketing channels.By implementing a prudent hedging strategy they can minimize the forex fluctuation related risks going forward.  Another possible milestone is the approval of USFDA for its Mangalore facility ,which is expected by the end of this FY.Since a major portion of its floating stocks already cornered and the process is still going on ,chances are very high for a sharp up move in its stock price once the new projects starts to contribute.We have seen this trend in many stocks in the past where there is very low floating stock and the available stocks with a  handful high profile investors. Here we can see such names like Lakshmi Mankekar, Satpal Khattar..etc. Based on many conventional valuation parameters like P/E ratio,Debt equity ratio ..etc  this stock is not a Buy . This company  shows huge loss in first quarter and we can’t rule out the same trend in few more quarters  ,but even after this loss Sequent currently trading near to its 52 week high which  is an appreciation of almost 200% from its 52 week low . From the filing to BSE it is clear that the promoters bought  shares from open market even above Rs.100/-. Their decision to subscribe shares in preferential issue even at high price is also indicating their confidence in the company.All together , this is a stock with  many ingredients  to become a  multi bagger  in future ,but you should also remember hunting for multi baggers always associated with a higher level of risk and  need enough patience .Take it or not , based on your risk profile. CMP is Rs.138/-

Disc : I have vested interest in this stock ,hence my views may be biased