Could This Hidden Gem Unlock Big Gains? 

Hi guys, this is Aditya Vora here. Hope all of you are doing well.

You know back in 2013, I was a shareholder of Strides Arcolab, which at that time was a good quality pharmaceutical company, in fact amongst the top mid cap pharma company. A news item pooped on my screen which read Strides declares one time dividend of Rs 500 per share.

Now if MRF gives you a dividend of Rs 500 per share is understandable, but how on earth can a company whose share price at that time quoted Rs 875 can give you a Rs 500 per share dividend.

Well, the reason for this special dividend was on account of sale of its injectables unit called Agila to pharma giant Mylan for a consideration of US Dollar 1.75 bn.

And Lottery...

The management returned 88% of this cash to the shareholders as a one-time special dividend.

For a shareholder, when you get 60% of the stock price as dividend, it is one of the best feelings anyone could have.

Now obviously I didn't anticipate such an event to happen, but on sale of a division for 8000 crores the company had 2 options, either give a big dividend or go for organic acquisitions.

It was a smart move that the company chose the dividend way.

This entire event which I spoke about is called special situation investing, where one of the reasons in investing in certain stocks is if you can anticipate an event.

The only contention to invest is not because of a special onetime event but also because the event which we are anticipating happening is likely to add value to an already strong company.

So, friends, in this video, let me talk about a company which is a combination of a) A Fundamentally Solid company, b) Its products enjoy sizeable market share, c) is a part of a strong conglomerate with best corporate governance... and the most importantly there is a special situation angle to it.

The company I am talking about is TTK Healthcare, part of the TTK group which is known by its Prestige brand of cookers, India's leading kitchen appliance brand.

Let me start with what the company does in brief and how it became a candidate of special situation investing.

TTK Healthcare limited has multiple business divisions which ranges from Animal Welfare products, Consumer Products, Medical Devices, Protective Devices and Foods.

Let's start with the consumer products division which account for 36% of revenues.

The consumer products division which is a B2C business segment has some leading consumer brands under its umbrella.

TTK Health care, under its brand name WoodWords Gripe water is a market leader in the Indian colic market. It has been marketed in India by TTK since 1928 and when it comes to baby care it is a household name amongst mothers. In fact, in 2022, the company reached an all-time high sale for its gripe water brand.

Secondly, the famous female deodorant brand EVA comes from the stable of TTK healthcare. In fact, very few people know that TTK through EVA deodorants was the first to launch a range of 'No Alcohol' skin friendly female deo in the country.

Along with deodorants, the company also has a home care brand under the name of Good Home which has expanded from a single product in 2007 to 6 categories which include scrubbers, air and room freshener sprays and cakes, odour remover sprays, drain cleaners, kitchen & appliance cleaners.

The USP is the distribution especially in the Southern part of India. In fact, the company is actively looking to increase its market share in the northern and western part of India along with pushing its products through the e commerce range and modern trade and supermarkets.

This division grew by 24% during 2022 and is poised to continue its momentum.

Now the other important division of this company, which in my opinion TTK healthcare is a pioneer in, is the protective device segment which includes condoms and allied products.

In fact, TTK Healthcare was the pioneer in getting protective products in India by forming a JV with London Rubber company and manufacturing Durex and eventually creating the Kohinoor brand in the protective device segment. However, a change in ownership and battle led to Reckit Benkiser getting control of both the brands while TTK Helathcare was left with manufacturing units.

It eventually created the Skore brand and is ranked amongst the top 3 in its segment.

This division contributed to 22% of sales.

So, these 2 divisions, which is the consumer products and the protective device division contribute to 55-60% of revenues.

The remaining 40% of revenues is divided between the Animal welfare division, the foods business, and the medical devices division.

Just to give you are brief, the animal welfare division accounted for 17% of revenues and includes pharmaceutical formulations in various therapeutic segments and feed supplements, for veterinary use. In fact, this segment grew by 27% in 2022.

Now, 16% of revenues for TTK Healthcare comes from a product which most of us have tried and relish having it, but don't know who makes it, as it is an unorganised market.

I am talking about Fryums and papads which all of us like to have. In fact, a major portion is exported while the domestic brand Fryums is strong in India and has created a category for itself.

Lastly, the company also manufactures medical devices which is heart valves. In fact, TTK Healthcare manufactured and distributed India's first Indigenous heart valve prosthesis. It's the first Indian made heart valve and one of the most affordable heart valves in the world.

While revenue from heart valves accounted for only 3% of total revenues, the company has made strong process which is likely to increase contribution from this segment. It has signed an agreement with an Overseas Manufacturer for direct import and distribution of Bi-Leaflet Valves and has recently received the regulatory clearance for the import.

Also, the company is in the final stages of signing an agreement for the manufacture and supply of cardiology products like PTCA Catheters and Coronary Stents.

Along with heart valves, the company also has an orthopaedics division which accounts for 6% of total revenues and has a portfolio of joint replacement products.

So, friends, this was the company in brief...

All divisions have a strong position in the market and are backed by tailwinds in their respective sector. If you take individual business like the medical devices business which barely accounts for 9% of revenues, has massive tailwinds as the central government is implementing a massive medical insurance scheme to cover poor families which in turn increase the demand for medical devices like stents and joint replacements.

If you look at the protective segment, there is no recession in this business. Besides, the company is winning export orders to supply protective devices to countries for a contracted period of 3 years atleast and has also tied up with United Nations and other organisations.

My point is, at least 50% of its business is self-sustaining and consumer oriented which enjoys a high valuation multiple.

Now let us come to a development which in my view is the most important development in the history of this company. This can potentially be a special situation investment.

Recently in May-22, TTK healthcare sold its human pharma division for Rs 805 crores to BSV Pharma private limited. Now that is a huge step and brings massive amount of cash flow to the company. The human pharma division accounted for 25% of revenues of TTK Healthcare with a turnover of Rs 160 crores.

Also, the gain on this sale amounts to Rs 765 crores which is massive.

Now let us look at the contours of the deal to figure out what opportunity lies for us.

The deal was set up in such a way that TTK Healthcare got 74% of the sale consideration as cash which amounted to roughly Rs 600 crores and 26% in the form of equity shares of BSV Pharma which amount to roughly Rs 200 crores. Other shareholders of BSV Pharma are Bharat Serums and advent international affiliate.

So as on September 2022, TTK Healthcare has a cash on the books of roughly Rs 742 crores and an investment of Rs 210 crores.

That is Rs 950 crores of cash and investment on the books as of September 2022.

Now, the market cap of this company as of today stands at Rs 1400 crores.

50% of the market cap is pure cash while if you include investments roughly 70% of market cap is in the form of cash and investments.

Let us see the implications of the above.

The first component which is cash: Now, I am sure the company will either give a hefty dividend or invest the surplus cash in some acquisitions or may be organically invest in its current business thereby enhancing return on capital employed.

The reason I say this is because historically the company has generated a 10 year ROCE of 15%. A lot of times if the management is not up to the mark, the excess cash if not given in dividend can become a threat too. I remember the company Just dial at a point in time many years ago had cash as a percentage of market cap of roughly 50-60%, but wrong decisions by the promoter eventually burnt all the cash.

I believe this risk is very limited when it comes to the TTK group.

The second component which is investments in BSV Private limited at Rs 210 crores today is at cost on the balance sheet.

I am sure this investments market value will keep on rising and may be some years later if the company decides to go public will be a massive value discovery for TTK Healthcare.

So, friends to end this, while special situation is makes investment in TTK Healthcare attractive, we are talking about a company with strong fundamentals and parameters.

Parameters like high ROE and ROCE provide comfort. You seldom find such good companies with cash to market cap at 50%.

Thank you for watching the video and do let me know your views.