Poly Medicure

Background

Incorporated in June 1995, Poly Medicure started manufacturing medical disposables like IV cannula, blood bags, in 1997 under the brand name Polymed. It currently produces over 40 different types of medical disposables at its manufacturing facilities spread over 180,000 sq ft in Faridabad.

Today it is the leading supplier of Intravenous (IV) Cannulae, Safety IV Cannuale, IV infusion sets and blood bags. Exports contributed to ~58% of Sales in FY10. It faces competition from Hindustan Syringes & Medical Devices Ltd., Eastern Medikit Ltd., and Romsons.

The company had acquired a subsidiary in USA, US Safety Syringes Co., LLC, USA in 2007. This company is yet to start business activities. Poly Medicure (Laiyang) Co. Ltd, China is another subsidiary which started commercial production during FY10 and achieved a turnover of Rs. 1.18 Cr but is currently making losses. The company expects the China subsidiary to break even in FY11.

The company has one Joint Venture in Egypt Ultra for Medical Products, Egypt. The Company has achieved sales of Rs. 28.45 Cr during the year ended 31st December 2009.


Main Products/Segments

Intravenous (IV) Cannulae, Safety IV Cannuale, IV infusion sets and blood bags.


Main Markets/Customers

Disposable Medical Device OEMS and hospitals.

Exports contributed to ~58% of Sales in FY10


Bullish Viewpoints

  • Expansion programme – The company was in the process of expanding its installed capacity by around 20% in FY11 to meet the increased demand at a capital cost of Rs. 30 Cr. FY10 installed capacity was 36.40 Cr pieces. (in 3 shifts).
  • Successful backward integration – Poly Medicure successfully indegenised production of needles used in IV Cannula and blood bags (earlier imported from Japan) resulting in major cost savings and control over product quality. The needle capacity is ~ 100 mn pieces per annum.
  • Product Innovation – Innovated manufacture of Safety IV Cannulae (with retractable needle that lowers risk of contamination to nurses/doctors administering patients) and successfully defended patent infringement suit brought on it by German major B. Braun. In developed markets like USA, only Safety IV Cannulae can be used. This is potentially a very big opportunity for the company and a growth driver for the future.
  • Turnaround in last 2 years – After a dismal FY09 and FY08 (where the company suffered degrowth in net profits on account of forex derivative losses), Polymedicure posted excellent results in FY10. Sales grew at 21% (136 Cr) y-o-y while Net Profits grew at 177% (16.43 Cr). Turnaround achieved on lower forex losses, successful backward integration, and other cost efficiencies achieved. In FY11, the company is on course to register a ~25% increase in Sales.
  • Return to High Margins & Profitability – Poly Medicure registered an Operating margin of over 22% and Net Margin of over 12% in FY10. Return on Equity (27%) and Return on Capital Employed  (25%) are back to robust levels. Going by 9m of FY11, this record is likely to be sustained in FY11. Most of the long term Forex derivative contracts entered into earlier have expired. Only 2 contracts remain, which the company assures it has learnt its lessons, and are adequately hedged and the impact will be limited if any.
  • Excellent Track Record – Its a young company – just 15 years old and starting from scratch, the company has come a long way. In Yr 2000, the turnover was just 10 Cr and this year the turnover is expected to be above 170 Cr.
  • Good team – The promoters are well qualified, young and ethical. The company has Mr. D R Mehta as its chairman and he is well renowned for his dynamism, honesty and fairness towards small shareholders.

Bearish Viewpoints

  • Forex Derivatives contracts – A major source of risk for the company has been the unexpired derivative contracts entered into by the company to hedge the risk of changes in Foreign Currency Exchange Rate on Future Export Sales against existing long term contracts. Outstanding as at March 31, 2010 for hedging currency related risk aggregate to Rs. 118.54 Cr (Previous year Rs. 197.73 Cr). The company has been accounting for the losses or gains on maturity of the contracts. The Mark to Market notional losses as on March 31, 2010 are of Rs. 15.43 Cr (previous year Rs. 41.10 Cr) and with the considerable volatility in foreign exchange rates, the impact may increase or decrease.
  • Raw Material prices – The company faces fluctuation in price of raw materials – which are crude derivatives (plastic granules, PVC rigid films, IV components). Raw material/Sales is ~43% in FY10
  • Company needs to keep developing new products also to maintain long term growth.

Barriers to entry

  • Backward Integration – Successfully indegenised production of needles used in IV Cannula and blood bags (earlier imported from Japan) resulting in major cost savings and control over product quality. The needle capacity is ~ 100 mn pieces per annum.
  • Product Innovation -Innovated manufacture of Safety IV Cannula and successfully defended patent infringement suit brought on it by German major B. Braun
  • Economies of scale – With an installed capacity of 36.40 Cr pieces, Poly Medicure is the largest exporter of IV Cannualae and other disposable medical products from the country.

Interesting Viewpoints

  • Poly Medicure wins patent infringement battle against German major B. Braun for its safety IV Cannula product in both German & Indian courts. The German major is free to appeal and/or initiate further legal proceedings against the company.
  • USFDA approval for its Faridabad plant (Dec 2010) is a big development. The company is aiming to enter the market by the middle of next year. Distribution partnerships will be key
  • Consolidating on this development, Poly Medicure expects to seal secured multi-year supply contracts for the US market from some major OEMs

Disclosure(s)

Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 2 years


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