Poly Medicure Management Q&A: Sep 2013

Management Q&A

1. OVERVIEW

Your company has had a spectacular journey. Kindly give us a sense of how you see the Medical devices business, and Poly Medicure’s place in it.

There is a huge opportunity still to be tapped. From our participation/co-charing in several industry bodies like the CII we are siezed that medical benefits/availability is constrained near the top. Yet to percolate down to the masses.

Non Communicable Diseases (NCD) is a 6 Trillion $ market for next 20 years. NCDs like Diabetic/Cardiac/Cancer care will be a focus area. There will be a shortage of Services and Service producers (Doctors & Nurses) for next 40 years.

80% of medical devices are still imported. Generic devices that can be manufactured are still not being manufactured in India. While custom duty on imported devices is low, ironically duty on imported RM (plastics) is being hiked. Manufacturing in India is not highly incentivised like in China where you can have all approvals/agreements in place within 3 days.

Give us a sense of the Medical Devices/Technology Business, and opportunity from India? And Poly Medicure’s place in it?

Medical technology is a $3 Bn annual market and that includes MRI machines, Xray machines and even Stents.

All leading OEMs are looking at manufacturing out of India. There are huge distribution networks that are looking at outsourcing manufacturing from India. These people are looking at Polymed – as a leading manufacturer of a basket of products – IV Cannula, Safety IV Cannula, Blood Bags, Catheters. We are manufacturing something like ~95 different products, today.

Even if 1% of that global market is outsourced from India that’s a $300 mn market (as compared to $25 Bn of China).

Kindly educate us on your business segments? Given what you have shared above, OEMs must be a big focus area?

We have 3 verticals. Domestic, Exports and OEMs.
We are among the Top 3 in local market. We have recently invested in expanding the Haridwar facility for the domestic market and focusing more on the local market. Domestic business currently is only about 50-60 Cr, rest is Exports. We plan to scale up domestic business significantly.

OEM vertical is our focus area. We plan to scale up this vertical significantly. As mentioned before there is interest being shown by lot of global players. Let us see what emerges.

Kindly give us a sense of globally how we are placed. Who are the main competition?

B Braun, BD, Hospitec, J&J, 3M and Poly Medicure are among the main players. By next year we could be among the Top 3 after B Braun & BD.

2. SAFETY DEVICES

One of your major successes has been the patent challenge with B Braun on Safety IV devices. Kindly educate us on the challenges and opportunities that this throws up? How significant is this for Poly Medicure?

B Braun is one of the largest players in the Medical devices/disposables field. Safety IV devices itself is globally a $300-350 Mn annual market size today. This was a 20 year patent granted in 1999, so is valid till 2018.

We developed a novel process/mechanism for manufacturing the Safety IV Cannuala which we believe is non-infringing. We have been successful in the patent challenge in many markets like Germany and India. We have also lost in some like Malaysia and injunctions have been placed against us in Spain, recently.

There is a big opportunity to grow globally with that product range. We don’t have a foot on the ground abroad in many important markets. We will have to grow cautiously, step by step – our pockets are not deep.

So what percentage of Sales is Safety Devices likely to grow to?

10% of Sales is where we are – can go upto 25% of sales eventually, in next 4-5 years

3. OEM RELATIONSHIPS/LEARNINGS

You have been supplying to OEMs and pursuing the OEM relationships in a big way now. What has been the learnings?

There has been big learnings in terms of Knowledge acquired and the approach followed by the major OEMS. Learning on knowhow – how to improve systems and processes have been huge. There is much to learn from how the global majors go about developing Vendors. With more exposure we are incorporating Global Best Practices in the organisation.

4. INCREASING AUTOMATION

You have been making significant investments in Automation. Given the labour situation is this a likely trend we are going to see going forward too?

Yes, we have recently invested about 50-60 Cr in automation that should serve us well for next 10-15 years. There are several advantages to increasing automation. We can maintain 24/7 product lines with ease. As human intervention reduces, we are able to produce a better consistent product each time. Process and output monitoring is very high with automatic alert/escalation mechanisms that get built in. All of these result in higher quality.

At the same time, increasing automation may decrease your cost arbitrage/competitiveness with major players like BD?

We will still be far more competitive than BD. Much of the automation has been achieved through home-grown machinery.

5. ORGANISATION BUILDING

Kindly throw some light on how the organisation is gearing up for the challenges ahead. What kind of structures/processes are you putting in place?

We are fortunate to have a Core Management Team that is exposed to best practices in the world. We had engaged E&Y for improving on our processes. They have completed a study of all our processes and delivered complete SOPs (Standard Operating procedures) for all the departments. And are now engaged in creating proper DOA (Delegation of Authority) and Management by Objectives procedures.

The next 50 leaders in the company are being prepared.

6. CONFIDENCE – AT ALL TIME HIGHS?

As the company has started turning in Stellar results, there seems to be huge confidence all round. You are shrugging off the shackles of the recent past. Kindly comment

Yes. Last few years we walked with heads  low as we struggled to come out of the forex derivative contracts issues. We managed to successfully put that phase behind us by focusing on things within our control – bringing in process improvements and  cost-efficiencies wherever possible, plugging leakages and cutting wastage.

Consequently as you would have noticed, our margins are much higher. We expect good cash flows for next 2-3 years. We are actively looking at JVs and/or acquisitions.

7. PREPARED FOR THE MEDIUM TERM?

While the organisation seems quietly confident and gearing up for a promising future, how prepared would you say you are – for harnessing the opportunities before you?

We are fully prepared on all fronts. as you know the biggest factor in India currently is Land/Infrastructure – this is something that can be a real dampner for growth if not available, at the right time. We are fortunate that with our Jaipur facility and the additional land available at IMT Faridabad, we are secured on this front for the next 5-6 years.

We can do a 20-25% Organic growth easily for the next 5 years.

8. THE CHINA FACTOR

What about the China vs India manufacturing Edge? How do you see us placed today, especially in the context of your industry?

The main difference is in Raw Material and Labour situation prevailing in the two countries. Raw material (plastics granules) are today more or less at global parity. However while China Labour rates have crossed $300, in India Labour is still available at $100 levels.

Also with the recent Rupee depreciation going from 45 to 65 vs $, that’s a 40% plus depreciation. We should retain a 50% cost-arbitrage situation for next 2 years atleast.

9. LONG TERM FUTURE

How do you see the Future for Poly Medicure?

10 years from now, we will be selling Products/Knowledge/Patents. We will be much higher in the value chain. Even with higher escalations on the costs side – manufacturing + RM – we will still be making good money.

10. NEAR TO MEDIUM TERM OUTLOOK

Jaipur SEZ completion – by Mar 2014. Is everything on schedule?

Yes. We should be ready by March 2014.

What has been the impact of recent hike in Duties on plastics granules RM?

We also get RM import at concessional rates because of our exports. So there isn’t really much of an impact.

What is the current debt level and where do you see it for FY14?

Total debt should be below 50 Cr levels around March 2014

Given that much of Jaipur Capex has been funded through internal accruals, Interest costs for the year, likely to go up only marginally above last years 6 Cr levels?

Yes. Should be around 7.5 – 8 Cr

What about Depreciation spend for FY14,?

Should be below 16 Cr, or so.

Disclosure(s)

Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 2 years;
Donald Francis: More than 5% of Portfolio in the Company; Holding for more than 6 months;
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Poly Medicure Management Q&A: Oct, 2012

Management Q&A

1. FOREX DERIVATIVE CONTRACTS – OUTSTANDING?

Please explain the current situation on Forex derivative contracts.

This is over. We have paid back all outstanding. 15th October was the last payment tranche. This was a significant drag on the performance of the company with almost 3Cr/month of losses. Now this will add straight to the bottomline.

2. MAIN PRODUCT SEGMENTS

Kindly tell us more on your main product segments.

IV Cannula account for 50% by Quantity. Rest 50% is from other products. We are manufacturing as many as 93 different products.

In Value terms IV Cannula (45%), Safety IV Cannula (6-7%), Blood Bags (10-12%).

How much do you expect Safety IV Cannula to contribute eventually?

Eventually this segment should contribute 10-15% of Sales

3. US CONTRACTS

What is the current status of the US contracts bagged by the company?

There are actually two contracts. The first one is for Blood Bags and that is going on as scheduled. The 2nd one is for Safety IV Cannula. This needed some design change and the project was pushed back by 6-8 months.

This is back on schedule now. Supplies should commence from Q1FY14.

How much this likely to start contributing?

About 20-30 Crs

4. MARGINS/PROFITABILITY IMPROVEMENT

If we were to remove the effects of the Forex derivatives losses, there seems to be big jumps in operating margins? Is it the right picture?

In previous years the company implemented measures for improving growth and profitability through backward integration and cost cutting mechanisms.

This year the company focused on plugging leakages and cutting wastage. There was a big drive in FY12 in improving profitability, driven mainly by the pressure from the losses on derivative contracts which was significant. But because of the drive there are now long term benefits.

We identified Raw Materials (RM) as a big area for cost-savings. We improved our sourcing significantly (from China and the sourcing knowhow from there), plugged leakages.

In our plant we used to have 6-7 hour powercut at times. The moulding material in the moulding machines would get stuck. There was wastage as well as delays due to this. So we invested in heavy-duty UPS (25-30 lakh) systems for uninterrupted operations. Earlier we had 32 cavity moulds. We have replaced them with 64 cavity moulds. We made big investments, but these will come with long term benefits.

Are the higher margins sustainable?

Like I said before, there are long term benefits. Should be sustainable because of operating efficiencies coupled with economics of scale. We are investing significantly on automation front.

Any new expansion will have significant automation. For example the next expansion at this plant (Faridabad) is an expansion cum automation plant. From 40 operators/line this will be down to 20/line. We will also be setting up a fully automated IV plant. from 53/line this will come down to 3/line. This will not only add capacities, reduce variable costs, but also increase consistency & quality.

5. LITIGATION WITH B. BRAUN – SAFETY IV CANNULA

What’s the latest status? Have there been significant costs?

Cases have been filed in many countries. Its moving through the legal/Appeals process. Everywhere we have won. We have won in Germany Apex Court. We have won in Italy and Malaysia. There have been significant costs yes, but at some places we have got back with costs.

As you are aware the Safety IV Cannula cost us some 5-6 Cr in development costs. RM addition is just 20 paise per unit. But Safety Cannula we are able to sell at Rs 15-17 per unit versus Rs 5.5 per unit of normal IV Cannula. The needles used to be imported earlier, now we make them here at 1/4th the cost. RM is still imported.

6. DOMESTIC BUSINESS THRUST

From recent announcements/expansion plans we are seeing some focus on the domestic market? Kindly elaborate.

Yes, we are expanding capacities to cater to the surging demand in domestic market as well. You see the ROMSONS group altogether (6 group companies) is doing a Rs 300 Cr Turnover in India. In contrast we hardly do 50-60 from this market, so there is a lot of scope.

So what are the new initiatives?

We used to mainly participate in Tendered business. NACO (National Aids Control Organisation) and other Tenders. There are few players in blood bags, not huge competition.

In the last 6-8 months, we have now appointed some Super Distributors, some 10 in the country. These are working well.

7. LOCAL COMPETITITION

Kindly give us a sense of the competition in the domestic industry?

Hindustan Syringes – This is the pioneer and 50 year old company in the medical disposables business. Primarily (90%) into Syringes. So some 10% of our products are common

Eastern Medikit – This company 5 yrs back was doing very well at Rs 250 Cr turnover. we were only 100 Cr then. There were some labour problems, and there were questions/ qualifications on balance sheet. This company has closed down recently.

ROMSONS – This is also a 50 year plus company, actually 5-6 group companies in the disposable medical & surgical devices segment in India. They currently have combined gropup turnover of ~300 Cr.

8. JAIPUR FACTORY

Kindly explain the move to Jaipur?

Well as you might be aware there is no space for expansion at Haridwar or Faridabad plants. We have applied for another plot in HSIDC, Faridabad. The Jaipur facility allows us some diversification (plant+labour and other fronts). Senior Management is already present in Jaipur managing 2 group companies so adequate management bandwidth is already available. Besides Rajasthan has a few companies in medical disposables space like Ahlcon Parenterals (catering to Blood Bags) recently acquired by B Braun.

What will the Capital expenditure required?

Roughly 20-22 Cr. 6-7 Cr for land and 15 Cr plant & machinery.

There was an announcement of Rs 100 Cr Capex spend?

That is for the overall Capex envisaged spread over next 1.5 to 2 years. The other locations will also see expansions/additional spends. As mentioned before we have another plot applied for in HSIDC, Faridabad.

9. PATENTS

There are so many manufacturers of products like IV Cannula and other such disposable products, and each have claims to 100s of patents? What’s the real use of these patents?

We use patents worldwide. We apply for patents only if we are having sales in that country. These serve the purpose of only a restrictive mechanism – so direct identical copy of any product cannot be made & sold; some redesign will have to be done before selling in the same country a similar product.

10. ENTRY BARRIERS

So what really are the entry barriers in your business?

a) There is heavy upfront capital investment. 95% of machines are imported
b) Huge focus on innovation – You have to keep innovating to survive
c) Regulations are becoming stricter

So what is your unique selling proposition (USP)?

In one word “Innovation”. We have been continuously investing in R&D. R&D spend in FY2012 was ~3Cr, up from ~70 lakh levels a few years back.

11. FOREX AND HEDGING POLICY

Kindly explain the Forex derivative contract, due to which you faced such heavy losses. Now that is behind us, what is the current hedging policy?

You see last 2 quarters, US$ – Rupee has been at ~52-57 levels. As per our derivative contracts, delivery was at 40-to the US$. Hence the big losses.

Current hedging is on Net Exposure. 60% is open and 40% hedged.

12. EXPORT BUSINESS

Kindly give us a sense on the Export Business. How much of it is based on long term contracts, and how do you ensure payments/receivables?

Yes, long term contracts work best for us on the payments front. In countries with geopolitical RISKS, we work only on advance payment/cash basis. Rest of the countries, its regular LC basis.

What is the effect of Europe region slowdown?

You will be happy to know we are in a different business. There is no effect in a slowdown/recession scenario. Medical sector does better sometimes.

13. US MARKET

When are we going to see Poly Medicure’s entry in the largest Medical market, the US?

We have some ~95 products. As of now the Safety feature is incorporated only in 3-4 products. And as you are aware, you can’t sell in the US Market w/o safety features. We are looking to incorporate safety feature in a few more products, then introduce as a basket – may be after a year or so.

You had acquired an US subsidiary/factory? what are the plans?

No plans of operations. May be use that company for Marketing set-up.

14. EGYPT SUBSIDIARY

What’s the status on this subsidiary? How is it doing?

This JV is doing well. We have an equipment supply arrangement with the company. Currently we do ~20 Cr worth of supply annually with assured margins.

15. MEDIUM TERM OUTLOOK

Kindly give us a sense where the company is headed in the medium term?

We should do well and keep growing at 20-25%. Margins will improve. Cash Flows will improve significantly. In 2-3 years we should be in a happy cash-surplus situation.

Disclosure(s)

Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 1 year;
Donald Francis: No Holdings in the Company; ;
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Poly Medicure Management Q&A: July 2011

Management Q&A

1. POLY MEDICURE HAS HAD A NICE RUN OVER THE LAST DECADE. SALES AND PROFITS HAVE GROWN AT OVER 25% CAGR. THAT’S A DECENT ACHIEVEMENT. CONGRATULATIONS!

What are the future plans? Where does the company see itself in the next few years? We have recently heard the company talking of a 300-400 Cr turnover goal – by 2013. That’s like a 30-50% plus CAGR for next 2 years. Kindly explain the reasons behind this optimism/aggression.

We have been able to grow at a 25% CAGR over the long term as noted by you. We have had a few significant successes in the last year – getting USFDA approval for our Faridabad facility, introducing Safety IV Cannulae product- these developments are likely to help us leverage new contracts and increase order flows. We should be able to register a 30% CAGR comfortably for next 2 years.

2.     SAFETY DEVICES MARKET IS REPUTED TO BE A $1BN CURRENT MARKET. A 5% MARKET SHARE IS WHAT IS BEING AIMED AT BY POLY MEDICURE IN THE NEXT 2-3 YEARS, OR $50MN FROM SAFETY DEVICES ALONE.

You have successfully defended patent infringement suits by B. Braun (Safety IV Cannulae products) in the recent past –both in Indian & German courts. What is the current status? Does this make Poly Medicure only the second player in the world after Braun to manufacture this product for developed markets? How many players and how is the competition in this segment. How has the company seized the opportunity in Safety IV Cannulae devices? Any major wins in outsourced contracts?

Yes we were successful in defending the patent infringement suits by B. Braun. So far there has been no further developments, and we have been shipping this product as planned. Globally there are 5-6 players. B. Braun is the market leader and holds 50-60% market share.
We are ramping up production capacities and will be able to start shipping this product in bulk by Q3/Q4 FY12.

3.     USFDA APPROVAL RECEIVED FOR FARIDABAD PLANT IN DEC 2010

Kindly explain the significance of this development for Poly Medicure’s plans for the developed markets. How has the company benefited from this in FY11? Will FY12 see the company extracting the most of this opportunity.

As you are aware USFDA approval was received in Dec 2010. This is a significant development coupled with our Safety IV Cannulae product development. In the US Market, safety feature is a must. We have started exports to US in small numbers in FY12, the full benefit of this will be available to us in FY13.
For the US market we are introducing a number of safety products including Safety IV Cannulae, Safety Catheters, Safety Blood Collection Holders, among others.

4.     PRODUCT SEGMENTS. SAFETY DEVICES, BLOOD BAGS, OTHERS

Kindly give us an idea of the revenue contribution & margins from major product segments. Which segments are expected to drive growth in next 2-3 years, where is the company’s focus and why?

IV Cannulae contributes ~45% of Sales today. IV Sets, Blood Bags, Catheters, Blood Transfusion Sets contribute another 20-25% Sales. Balance 30% comes from a variety of other small products. Margin contributions vary in the range of 18-25%.
All segments are growing strongly. Safety devices should see a spurt in the next 2 years as contribution from this segment is expected to go up from 7-8% to 15%.

5.     BLOOD BAGS SEGMENT.

Recently we saw an announcement by the company on a contract for supply of single Blood Bags for total consideration of INR 12.93 Cr from Ministry of Health & Family Welfare. Please share the significance of this order, does it open up this segment for major growth for Poly Medicure?

Blood Bags segment has been a steady growing segment for us in the last few years. Yes this is a major order from National Aids Control organisation (NACO), and the single largest order so far in this segment. Sales for this segment so driven by Govt. Tender supplies or to Hospitals which is License based.

6.     CUSTOMER SEGMENTS –TOP CUSTOMERS & REPEAT BUSINESS

Who are your top Customers? How much do your top 5 customers contribute in revenues? Does any customer contribute more than 10% of Sales?

International OEMs are some of the top customers. Top 5 customers contribute 30-35% of our Revenues. Sales are evenly distributed and no single customer accounts for more than 10% of Sales.

7.     EXPORT MARKETS. SALES & MARKETING. OUTSOURCED MANUFACTURING FOR OEMS.

Exports contributed some 58% of Sales in FY10. Kindly explain your sales & marketing set-up for developed markets. What contribution is expected from outsourced manufacturing contracts? Are margin contributions likely to be much higher in outsourced contracts for Safety IV Cannualae. What is the split between Europe and US markets currently, and what is the picture for next 2-3 years?

In most countries medical kits supplies are a Tender driven business. In overseas markets we go through distributors. 50% of the supplies are for OEMs and 50% under Poly Medicure brand. There isn’t much difference in margins.
Europe accounts for ~45% of exports. US market supplies have started in a small way which should go up significantly in the next 2 years.

How about the domestic market? Is your sales process any different here?

As mentioned before, this is mostly a Tender driven business in India. Roughly 60% of our domestic sales comes from Tenders, which is addressed by our direct sales force. The sales force also addresses major hospitals in Metros. About 15% of additional sales come from Direct Sales and the rest comes through distributors.

8.     PRODUCT PRICING. SAFETY IV CANNULAE

Kindly give us a sense of product pricing on IV Cannulae vs Safety IV Cannulae and the margin contributions.

Well a IV Cannulae from Poly medicure typically sells for Rs 5 or 5.5 and a Safety IV Cannulae we can sell at Rs.17, though the addition raw material cost is hardly 50 paisa to a rupee. B. Braun sells the Safety IV Cannulae at Rs. 45-50. (They can provide finer guage of needles for kids & babies). Internationally too, the prices are in the same range.

9.     MARGINS & PROFITABILTY. SUSTAINABILITY

After a dismal FY08 and FY09, Poly Medicure registered an Operating margin of over 22% and Net Margin of over 12% in FY10. This was sustained, infact marginally improved in FY11. Return on Equity (28%) and Return on Capital Employed (25%) are back to robust levels for the last 2 years. How sustainable are these going forward? Are margins and profitability on an upward trend consider significance of new product segment and volumes coming from there?

Margins shopuld show an uptrend considering volume increases and other cost-cutting measures undertaken by us including waste recycling. 30% growth in earnings is a given.

10.  FOREX DERIVATIVES CONTRACTS – FY08 AND FY09 SAW THE COMPANY TAKING A HIT ON ACCOUNT OF 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). What is the current position on this front? How much of a risk does this currently pose? When will these contracts finally be over?

There are 3 outstanding contracts, out of which one will expire in Sep 2012, and another 2 will restart from Oct 2012, but for only a year. We continue to hedge these using simple 1 year forwards. Having learnt our lessons, we monitor these movements very strictly. We don’t think there is any major risk from these.

11.  CAPITAL EXPENDITURE. TO GROW SALES, POLY MEDICURE NEEDS TO CONTINUALLY INVEST IN CAPACITY EXPANSION. WE HAVE HEARD OF INVESTMENTS OF RS.100 CRS IN CAPACITY EXPANSION.

What is the current capacity? How much was the capital expenditure incurred in FY11 and what is the expected ramp up in the next 2-3 years?

25 Cr has been invested in FY11 towards new building and machinery. Another 25-30 Cr is being invested in FY2012 towards increasing automation. Balance 40 Cr is looked to be invested in the Jaipur SEZ at an appropriate time.

12.  DEBT POSITION. FUNDING

FY11 debt stood at 40 Crs. What is the current debt position? How much additional debt is likely to be taken to fund current capacity expansions?

Debt levels including working capital will remain at similar levels in FY12.

13. EUROPE AS A MARKET. EURO AS A CURRENCY. RISKS

How much of company’s sales comes from Europe. And is this booked in Euros or US$? Given the serious economic environment in Europe currently and the attendant risks both on the market and the currency, what is the sense that you are getting from your customers, and what has been the impact, if any? What steps are being taken to mitigate these risks?

As mentioned before 45% of Exports are from Europe. Roughly 15% of such sales are booked in Euros, and the balance is all booked in US$.
Our existing customers in Europe are large players and we have a long relationship with them. We haven’t got any sense of slowdown in business from them, so far. Yes, Euro as a currency has been fluctuating a lot. We hedge our Euro Sales on simple 1 year forward contracts.
Any new players we are booking sales on 100% advance basis.

14.  MANUFACTURING FACILITIES BEYOND INDIA. THE COMPANY HAS BEEN TRYING TO SET UP A MANUFACTURING FACILITY IN SOUTH AMERICA FOR SOME TIME NOW. ANNOUNCEMENTS HAVE BEEN MADE A FEW TIMES, BUT NOTHING HAS FRUCTIFIED SO FAR.

Besides manufacturing facilities in India, you already have a manufacturing facility in Egypt and another in China. There seems to be a focus in the company for locating manufacturing close to important markets, but the contribution has been negligible so far? How has been the experience managing these facilities and what has been the progress? When will these contribute significantly to topline and bottomline?

The Egypt JV is a different type of project where we provide consultancy, machinery and some of our products on a 10% markup/commission basis. So that’s an entirely different project.
The Chinese facility is expected to break even in FY12. But more importantly it has been a great source of RM sourcing for us -from China, and neighbouring regions. The savings on the sourcing side has been ~20%.

Why is the South American presence so important? Is it for the Brazil market or catering to US market?

Well we have been looking to acquire a manufacturing facility in these markets. Brazil can be a very important market to gain access to. If we get some manufacturing facility in Europe at a reasonable price, we are open to that too.

15. OVERSEAS ACQUISITION.WE HAVE BEEN HEARING OF AN ACQUISITION IN TEH RANGE OF $20-30 MN FROM TIME TO TIME.

What is the focus here? Is it to acquire a manufacturing facility or a sales & marketing set-up in developed markets?

Nothing has materialised so far. We are keen on acquiring a manufacturing facility close to developed markets where we can draw synergies form our production facilities, at the same time get increased market access for our products.

16. COMPETITION. PLEASE TELL US MORE ON THE COMPETITION YOU FACE FROM BITH DOMESTIC AND MNC PLAYERS IN THIS MEDICAL KITS & ACCESSORIES BUSINESS.

Hindustan Syringes are the biggest players in our niche, but only 10% of our product lines co-incide, as they concentrate mostly on syringes, which we do not manufacture. Then there is Eastern Medikit who compete directly with us on the whole product range, but they have poor financials. Besides them there is the Romsons group which has 6 brothers operating different facilities. Effectively we are the 2nd largest player in this segment.

MNC presence is small. There is a MNC player Bechtel Dickinson who have set up an ultra-modern plant in Manesar, Haryana. The plant set-up cost is 3x ours of comparable capacity. They cannot compete head-on with us and restrict themselves to the high-value niche segment.

17. RAW MATERIALS. RISKS

Raw Material is ~40% of Sales. With a rising crude prices scenario, raw material prices must be a cause for strain. Kindly explain how the company manages raw material price volatility risks.

As you mentioned raw materials is some 40% of Sales, and so far we have been able to manage the volatility without significant impact.

18. TAX BENEFIT WITHDRAWALS. IMPACT ON MARGINS.

Effective tax rate for the company in FY10 and FY11 was under 10%. Now with the withdrawls in the benefits, what is the likely tax rate for FY12, and how significant will be the impact on net margins and growth? Any impact on Jaipur SEZ plans also because of the SEZ Tax exemptions being withdrawn too?

Yes, there will be significant impact on account of this. We are hopeful of minimising the impact through higher depreciation in our accounting and the margin expansion that is likley to accrue form the new products.

19. SHAREHOLDING PATTERN

Company has 48% in promoter holdings and then about 37% by persons holding more than 1% (few bodies have been holding since several years). Please throw some light on the shareholding pattern. Are some of these parties part of promoter group?

Most of these are people known to the Promoter group – not part of the promoter group. These people are long term shareholders. When our share price was in the RS 10-15 range, they have not exited and now that they know the company is on an inflection point, they are unlikely to exit their holdings.

20.  MAJOR OPPORTUNITIES & CHALLENGES

Where does Poly Medicure see itself in the next 5 years? What is the size of the opportunity in its niche? Can we see Poly Medicure reach 1000 Cr Sales, by when? What are the major challenges before the company and where are the big opportunities?

Well we are on course to register a 25%-30% growth for the next few years. The significant developments in FY11 should see us win major contracts from OEM suppliers and increase our presence in developed markets like the US. So this growth itself should take us to 600 Cr in the next 5 years. Any Acquisition that we do is likely to add to that and help us in reaching the Rs 1000 Cr mark.
The main challenges are in scaling up to meet the growth in demand. Funding is not an issue, but Labour orientation and skills training is a major challenge. We are also trying to increase automation in our factories to help on this front.

Disclosure(s)

Ayush Mittal: More than 5% of Portfolio in the Company; Holding for more than 2 years;
Donald Francis: No Holdings in the Company; ;
: ; ;
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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