Improving Industry Dynamics and Strong Earnings Growth
Poly Medicure Limited (Polymed) is one of the leading medical devices manufacturer and exporter in India with a dominant position in medical consumables market with the focus on Innovation, Safety, and Quality.
Polymed is engaged in the development, manufacturing and marketing of quality Disposable Medical Devices. The company manufactures and supplies in India and internationally, a diverse portfolio of disposable medical devices in the product verticals of Infusion therapy, blood management, gastroenterology, surgery and wound drainage, anesthesia and urology. The company has a well-diversified and de-risked business model, comprising a wide range of products with clients across more than 110 countries. The company currently operates five manufacturing units in India and three abroad in China, Egypt (JV) and Italy.
Plan1 Health s.r.l., Italy, (a step-down Subsidiary) develops, manufactures and sells medical devices, in particular vascular access systems and long-term implantable systems worldwide.
Implementation of Ayushman Bharat (AB-PMJAY)
AB-PMJAY, launched on 23rd September 2018, is the future of India’s healthcare ecosystem.It is a path-breaking initiative of the Government of India and is expected to positively impact across all levels of healthcare. It has opened multiple avenues for growth of the Medical Devices Industry.
Robust domestic growth
Covid-19 pandemic has exposed India’s inadequate health infrastructure. In the fight against Covid-19 government has increased focus towards improving India’s healthcare infrastructure and deepening healthcare sector. Polymed has been investing heavily in increasing its manufacturing capacity and R&D; it has also been consistently introducing new products which are import substitutes. Currently 70% revenue comes from exports. We see significant scope for domestic business to grow and improve its share of total revenue.
Acquisition of Plan1 Health S.R.L.
With the acquisition ofPlan1 health S.R.L., an Italy based manufacturing company, Polymed now has access to new technology in Oncology and Vascular Access devices and opens more opportunities with the acquired company’s worldwide customer base. Plan1 Health products adhere to the highest quality standards in Europe and are synergetic with the company’s product portfolio.
New Jaipur facility to drive growth
The company has embarked on an expansion plan for FY19-20 and FY20-21 by investing approximately Rs.100 crore. The new capacity will cater to additional demand created through Ayushman Bharat/ PM-JAY over the next few years and new customers in developed countries.
Beneficiary of Make in India Boost
Despite the strong demand for medical devices, India's domestic manufacturing has remained low. The medical device market continues to be dominated by imported products, which comprise of around 70% of total sales. Government wants to reduce dependence on imports and boost Make in India, as a result health cess of 5% on import of medical equipment was imposed on 2nd February 2020 in Union Budget. Polymed is strong beneficiary, as it has strong focus on manufacturing products which are import substitutes.
Classification of Medical devices as Drugs will ensure consolidation in industry
In consultation with the Drugs Technical Advisory Board, the government announced on 11 February 2020 that all medical devices intended for use by humans or animals as are to be classified as drugs and regulated under section 3 of the Drugs and Cosmetics Act, 1940, as from 1 April 2020. This will ensure that all medical devices meet certain standards of quality and efficacy, and make medical device companies accountable for the quality and safety of their products.
Lack of regulations and its enforcement was the major reason for low-medium brand image of India’s medical devices in the exports market. We believe these stringent regulations will ensure quality and improve market share of branded players like Polymed.
Focus on R&D and innovation
Polymed has developed the technology to create moulds internally with strong R&D team comprising of 50+ engineers and 30+ engineers in process engineering. The company operates a research and development centre at Faridabad, Haryana, which is approved by Department for Scientific & Industrial Research and by the Ministry of Science & Technology, Government of India. R&D is primarily focused on developing new products within existing as well as new critical care product verticals and further improving existing processes and productivity.The company’s focus is on increasing its R&D spend to 5% of revenue and commercializing new innovative products.
As business of the company comes under essential services, the company was able to run the operations without much disruption, but it had to face short term issues with regards to manpower availability and supply chain. We believe there is no material impact of Covid-19 on the company; rather governments globally are working to improve their healthcare infrastructure, which is positive for companies like Polymed.
Foreign currency Risk
The company operates significantly in international markets through imports and exports and therefore exposed to foreign exchange risk arising from foreign currency transactions primarily with respect to USD/Euro/GBP/JPY.
The main Raw materials for manufacturing of Medical devices are various types of Plastic Granules. The prices of Raw materials are mainly dependent on the price of Crude Oil and the majority of Raw materials are being imported by the company.
|Particulars||FY2019||FY2020||FY2021 E||FY2022 E|
|Gross Profit Margins||65.80%||68.40%||68.80%||69.80%|
|Profit before Tax (PBT)||98.69||123.58||150.46||201.56|
|Provision for Tax||34.68||29.85||37.91||50.79|
|Profit After Tax||64.01||93.73||112.54||150.77|
New product launches and capacity expansion will drive incremental growth going forward. We expect robust domestic growth in demand of medical devices through implementation of Ayushman Bharat and with acquisition of Plan1 Health S.R.L. (Italy), exports are also expected to improve.
We expect the company to report Revenue and PAT CAGR of 20% and 27% respectively over FY20-22E. With strong earnings growth and improving industry dynamics, P/E multiple to expand, thus we iniate a Buy.