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com
This is not a buy or sell recommendation. We are in the process of compiling data
sheets of companies that we track / own so that in future we may use these for buying /
selling stocks of such companies. Reason for sharing is hopefully somebody who has
more information / insight may get in touch with us or for a healthy debate.


Punjab Chemicals & Crop Protection Ltd
Date : 26-May-14
Traded In : BSE B (506618)
Face Value : 10
CMP : Rs 78.10
EPS (TTM) : 8.62
P/E : 9.06
Market Cap : 95.77 Cr
Enterprise Value : Rs 387.92 Cr
52 Week H/L : 86.4 / 29.15
Website : http://www.punjabchemicals.com/

The base report is available in
http://www.scribd.com/doc/216086492/Punjab-Chemicals-Apr-2014

1. Update about the pharma division: Frankly speaking there has been no update from
the company side. It is an update from my side or rather a lapse on my part to dig deep
and get some data about the pharma division of the company in the earlier analysis.

2. Pharma division of PCCPL

This division comprises the business of Chandigarh-based Alpha Drugs Ltd, which
PCCPL acquired in 2003 from DSM Fine Chemicals of the Netherlands for Rs 25 lakhs.
This was the first acquisition of the company and was merged with itself. The division is
into manufacturing of anti-bacterial bulk drugs and intermediates of penicillin-based
antibiotics, Trimethoprim, Gallic acid and its derivative products.

Trimethoprim, the flagship product of the company is a bacteriostatic antibiotic mainly
used in the prevention and treatment of urinary tract infections (Cystitis). The division
also undertakes contract manufacturing for GSK & Ranbaxy

The financials of the pharma division are as below


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It is seen that the division has done well in spite of the financial strain on the company
and with very inadequate capex

The product line is restricted to few bulk drugs, drug intermediates and specialty
chemicals. The division is growing slowly mainly due to lack of working capital. With
the introduction of another API, the number of products has increased. The CRAM
business in the division is giving good returns.

As we do not have a base to develop new products, we must remain dependent on
large companies which are organized to develop products and sell finished products
in the competitive market.

(Src: Annual Report 2013)

The contract manufacturing of few products has limited the Company's potential of
development. However, this helps to generate more revenue and utilisation of the
plants.

(Src: Annual Report 2012)

We would assume when (and if) PCCPL turns the corner and pumps in money into the
pharma division it would be a money spinner

3. CDR

When the company fell into hard times, it is evident that the company wanted to spin off
or sell the pharma division

This division contributed Rs 700 mn to FY10 consolidated revenues (12% of overall
revenues). Ernst & Young, appointed for valuing this business, has assigned an
enterprise value of Rs 800 mn. The dedicated debt for this division is worth Rs 200
mn. As per the management, the company is either planning to sell this division or
dedicate 80% of the plant to a US-based entity. If any of these plans materialise, the
company will be able to raise Rs 600 mn. Though we have not built in the sale of this
division into our earnings estimates, we believe that selling this division or dedicating
the plant to a US entity may not be difficult since the plant is a pioneer in the
manufacture of import substitute intermediates for semi-synthetic penicillin.

(Src: Independent Equity Research Crisil dated 2-Dec-2010)

It seems that the company has realized that the pharma division has good potential

Working Capital Demand Loan has been converted to Working Capital Term Loan
(WCTL) with following terms:-

Rs. 5,000 lacs carrying interest @ 8% p.a. and to be repaid in full till 30
September 2012 ,out of which the company has paid Rs. 2,044 lacs to the bankers.
The company is under discussion with the lender to renegotiate the terms of
repayment by offering certain alternative assets for disposal to repay all in lieu of
disposal of Pharmaceutical division as per CDR scheme. The Company is awaiting for
such approval based on which the Company will repay balance amount of Rs. 2,956
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lacs of WCTL to the lenders as per the CDR scheme. Pending the approval from
lenders to disposal of alternate assets, the Company has executed "Power of
Attorney" in favour of lenders to dispose off the Pharmaceutical Division of the
company to repay the WCTL as per the CDR scheme

Repayment of remaining amount has been restructured over 40 quarterly
installments, commencing 30 September 2011. The interest rates have been
restructured @ 8% p.a. for the period ended 30 September 2012 and thereafter at
varying rates linked to Monitoring Institutions' base rate

(Src: Annual Report 2013)

Company has offered to sell other assets instead of the pharma division

4. Standalone financials of the pharma division

This is going to be a very basic and primitive calculation. The activity is to try to find the
approximate performance of the pharma division.

Extrapolating the nine months results, we get an annual turnover of Rs 75 crore and
segment results of Rs 6.48 Cr.

Assumptions , assumptions , assumptions : Let us assume the division has debt of
Rs 15 Crore to be paid in 5 years at an interest rate of 15%, we would assume the
interest per year would come to Rs 4 Crore

Now the PBT would be Rs 6.48 Cr Rs 4 Cr = Rs 2.48 Cr

Let us deduct 34% as tax, thus PAT would be Rs 2.48 Cr Rs Rs .84 Cr = Rs 1.64 Cr

This is a worst case scenario of Rs 15 Cr debt at 15% interest. If the division can make a
net profit in such a scenario think about how the division would perform with less debt
and a decent capex

Assumptions is the mother of all **** ups - Quote from the movie Under Siege Part 2.
Ah I had to introduce the quote because whenever I assume something immediately this
quote flashes through my mind

Synopsis

The pharma division would be an asset as and when the company turns around. In a
worst case scenario too, a demerger or sale of the pharma division will definitely benefit
PCCPL.

Have become pretty bullish on PCCPL (at least for the next 4 quarters).

References

1. www.bseindia.com
2. www.punjabchemicals.com
3. https://www.sbi.co.in/user.htm?action=viewsection&lang=0&id=0,17,389
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Disclaimer

General: This report is not a buy / sell recommendation. Buying stocks must be done
after careful analysis and the above report can be used as a base for the analysis and
should not be used as sole basis.

Vested Interest: The author does have position in the above stock @ average price of
Rs 76.10. He may purchase / sell the same in the future in the short or long term based
on his conviction and his financial situation.

Data Validity: The data is collated from various sites in the internet. Even though we
have tried our best, there may be discrepancy due to human error while collating the
data. The author should not be held responsible for such mistakes. The data can be
looked up at various websites given in the reference section.

Valuation: The author is not an expert and his valuation may be off the mark.