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Amrutanjan Health Care :

From 110 To 540, 380%
Returns & Still Holding
Chetan Phalke | November 19, 2015 | Stock Recommendations |
No Comments

We covered Amrutanjan Healthcare in 2013 w hen the stock w as

trading around 110-130 rupees range. The stock w as shif ted f rom
HOLD to BUY list again w hen it w as trading around 420 to 450
range this year. It trades at 530 now & our subscribers / clients are
still holding it f or f ar higher levels.

The company is into over the counter pain relief products such as
balms, rolls & sprays. 80% revenue comes f rom w hite & yellow
balms. Company has also f orayed in w omen’s sanitary napkins &
f ruit beverages, how ever these businesses are still in early stages
& nothing big has been achieved there. Amrutanjan is one of the
oldest brands in India w ith 100+ years legacy. It has strong
presence in south & w est india w ith more than 3.2 lac retail outlets
and 1750+ stockists covered.

Niche Se gm e nt, Sim ple Bus ine s s

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The pain relief / congestion segment together is small & entire market
is valued at not more than 2000-2200 crores as on date. When w e
entered the stock our logic w as simple;

The brand carries a certain legacy & recall / trust is on the

higher side.
This business does not need any heavy capacity or
investments. The company just needs to w ork on the branding,
marketing & distribution channels.
With changing demographics & urban lif estyles, headaches /
joint aches / back ache etc are everyday issues and over the
counter market shall move steadily giving enough room f or
company to grow .

M ode rate Sale s Grow th But Huge Ope rating Le ve rage

Amrutanjan Health Care did not need any capital & heavy
investments to grow . Sales grew modestly, but margins
expanded f aster. Sales are up by just 20% during 2013 to 2015.
How ever prof its are up by 50%.
If w e consider estimated 2016 results, then sales shall be up by
less than 30% since 2013. But prof it grow th w ill be 90%.
Company has no expenses other than marketing / branding
investments, that ensures sustained operating leverage & its
operating prof it margins w ill continue to grow f urther.
As the company is debt f ree and does not need f urther debt /
capital, prof it grow th w ill continue f rom internal accruals. There
is enough room to keep on grow ing sales at 15 to 20% per
annum as market f or pain relief products expands. This allow s
Amrutanjan to earn incremental return on its capital employed.
As a result ROCE should shoot up tow ards 40% and remain
there. Return on equity too shall settle in 25% plus kind of range.

Low Equity Bas e , Quality Of Earnings Grow th Le d Re -Rating

The company operates in a very small segment & is a laggard w ith

less than 10% share of its category. That’s w hy most of the market
participants w eren’t really excited about this company. Amrutanjan
had one benef it, its low equity / net-w orth base of 85 crores on
sales of 150 crores w ith a potential high margin business. And that’s
exactly w here things have turned around.

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As margins are expanding along w ith moderate sales grow th,

company’s net-w orth / equity shall grow f aster. Even if it grow s at a
modest 15-20% sales grow th, net-w orth can double up and keep on
grow ing there af ter. That’s w hy the stock has been re-rated f rom
price to book of 2x to 7-8x. And PE of 40-50 range.

Also, Amrutanjan is a mix of pharma & FMCG type of a play.

1. Consumer f acing brand

2. Over the counter ( available at medical stores, kirana stores,
super markets )

Having a consumer f acing prof ile has helped in re-rating as w ell.

How Far It Can Go…Be s t Cas e Sce nario

Amrutanjan has its own limitations to grow. It won’t grow b eyond a

certain extent unless management decides to leverage the b rand,
and foray into other consumer goods or products. I don’t think the

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stock w ill trade at more than 10 times book even in best case
scenario w ithout changing the business prof ile. Even if it does, it
w ont sustain.

PE of 40-50 range shall remain till the time ROE is expanding f urther
and plateaus at certain stage. Once that happens, there w ill be a
time w ise correction and the stock may eventually settle dow n
tow ards 20 PE.

Below estimates are based on modest 18 to 20% grow th w ith

existing business / product prof ile. If the management changes its
course, then these estimates stands invalid. Whatever hints w e get
f rom the company, their f ocus is entirely on increasing the
penetration of products across various markets, and they are not
entering new areas as of now .

These are b ack of the envelope calculations, as i’m tracking the

company since 2012-13. I’m not a f ollow er of preparing cash f low
models or other valuation metrics in particular. I pref er playing on
changes in margin prof ile, management behavior, structural change
in business environment and valuation expansion etc. Basically,
10-20% is numbers, rest all is qualitative and market perception
aspect.

Values In 2015 2016 2017 2018

Crores

Estimated Estimated Estimated

Net Sales 17.53% 18% 20% 20%
Grow th(%)

Gross 175 206 248 297

Sales

PBIDT 28 39 52 71

PAT 15 23 31 42

Dividend 5 6 8 10

Net Worth 95 111 133 165

Return On 30% 35% 39% 43%

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Capital
Employed
(%)

Return On 16% 21% 23% 26%

Equity (%)

Operating 16% 19% 21% 24%

Prof it
Margin (%)

Net Prof it 9% 11% 12% 14%

margin (%)

EPS 10 16 21 29

Book Value 65 77 92 114

Best Case
Scenario

Price / 7 to 8 8 to 10 8 to 10 8 to 10
Book
Value(x)

PE (x) 45 to 45 to 50 45 to 50 45 to 50
50

Stock Price 480 650 to 900 to 1200 to

800 1100 1400

The Be s t Is Ge tting Price d In….Avoid Fre s h Entrie s …Be tte r

Opportunitie s Available Els e w he re

1. Continue to hold the stock only if your entries are b elow

450-480 range.
2. At present valuations, most of the re-rating part is done.
Another 150-200 rs up-move, and the stock becomes an
earnings play.
3. Stock shall continue to trade at 40-50 PE till ROE is expanding
rapidly & inching upw ards.
4. The best is priced in at present valuations. Even a slight
disappointment in earnings w ill lead to 20-30% or more
correction in the price. ( examples : haw kins, cera etc. )

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5. Risk rew ard is not in f avor f or long term investors. Better

returns can be made in other stocks if you are w illing to take
similar amount of dow nside risk.
6. In best case scenario, investors may get 2-3 x returns over the
next 3 years. In w orst case scenario, the stock might not give
more than 40-50% returns f rom here on.
7. Company has a land parcel valued above 100-150 crores or so.
How ever such asset w ill only add tow ards protecting dow nside
in case of bad operational perf ormance. It w ill not be a game
changer f or the company. Even if the land is monetized,
company does not have any avenue w here it w ill allocate such
a big capital and earn incremental returns. Ultimately money w ill
come back to shareholders via one time dividend, as it happened
in 2009.

Mid-caps Create Wealth When You Invest For

Valuation Gaps Combined With Earnings
Growth. Betting On Stocks That Are
Over-Valued Will Not Create Wealth Even If
They Deliver Decent Earnings Growth.

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