April 27, 2017

Vikram Thermo (India) Research Report

www.drvijaymalik.com has a dedicated section for investment & stock specific queries of readers: “Ask Your Queries”. Over time, readers have asked queries about multiple stocks in this section. Answers to these queries have been done post preliminary analysis of the stocks under consideration. Such analysis has been found helpful by readers.

“Analysis” series is an attempt to summarize & share with all the readers, the key questions and their answers, which have featured on “Ask Your Queries” section. The primary aim of this new feature is to share the knowledge with all the readers of the website.

The current section of this series, “Q&A” covers Vikram Thermo (India) Limited, an Indian player active in manufacturing pharmaceutical excipients and other chemicals under brands: DRUGCOAT, DRCOAT and DPO.

Analysis equity research report Vikram Thermo (India) Limited, pharmaceutical excipients, brands, DRUGCOAT, DRCOAT, DPO


Reader’s Query


Dear Vijay Malik,

Hope this e-mail reaches you in good spirit and health.

I have read your articles and find them extremely useful. Based on the inputs from your articles, I have analyzed a micro-cap company called Vikram Thermo (India) Ltd. All the important parameters related to financial and management analysis hold good.
Please find the attached spreadsheet with analysis.

Vikram Thermo (India) Limited


Company Summary (from Reuters):


Vikram Thermo (India) Limited is an India-based company, which is involved in the manufacturing, marketing and export of pharmaceutical excipients and chemicals. The Company's principal products/services include other chemical products.

The Company owns two brands under pharma excipients segment, including Drugcoat, which is a methacrylic acid copolymer-based basic pharma polymer and Drcoat, which is a customized ready mix pharma polymer. The Company's products include pharma polymers and aromatic chemical-DPO. Diphenyl Oxide (Diphenyl Ether) is used as a perfumery stabilizer and for manufacturing heat transfer fluid. Its Drugcoat includes L&S series; E series; RL & RS series, and NE series. Its Drugcoat also includes enteric coating products; immediate release film coating products, moisture barrier products, and specialty products. The Company offers a range of products, including basic pharma polymers, as well as ready-mix coating products.

Company Basics:


  • Market Capitalization – 65 Cr
  • P/E – 13
  • D/E – 0.02
  • Sales Growth 10 Yrs – 14%
  • Profit Growth 10 Yrs – 18%

Criteria
Vikram Thermo (India) Ltd

Financial Analysis

Sales Growth
14%
Profitability
12%
Tax Payout
34%
Interest Coverage
48
D/E Ratio
0.02
Current Ratio
3.56
Cash Flow
Positive
ROS
17%
Cumulative PAT vs CFO
cPAT~34.46
cCFO ~ 32.19
Net Fixed Asset Turnover
3.68

Valuation Analysis

P/E Ratio
13
P/E to Growth Ratio (PEG)
0.61
Earnings Yield (EY)
7.68%
P/B Ratio
2.02
Price to Sales Ratio (P/S)
1.68
Dividend Yield (DY)
1.29

Business and Industry Analysis

Comparison with industry peers
Industry peers like Lupin, Cadila, Divi's Lab sales growth have grown at more than 20% over the past 10 years but are available at higher valuations.

Vikram Thermo has grown at a decent pace of 14% over the past 10 years.
Increase in production capacity and sales volume
In 2010, 2011, 2013, 2014 annual reports capacity is mentioned. But in subsequent years this has not been mentioned. Consumption (in tonnes) of Drug Coat and DPO is mentioned until 2010, 2011 ARs.

However considering the amount alone, Drug Coat sales has increased from 119,142,262(INR) to 301,028,128(INR) an increase of 152%. DPO sales has increased from 52,534,133(INR) to 123,500,022(INR) an increase of 135%.
Conversion of sales growth into profits
Average Net PAT for the period between Mar-2007 and Mar-2016 is 20%.

NPM % is healthy at an average of 11% for the period between Mar-2007 and Mar-2016.
Conversion of profits into cash
~cPAT - 34cr vs ~cCFO - 32cr
Creation of value for shareholders from profits gained
Retained Earnings - 27.05
Market Capitalization - 64.81
Value created per INR of retained profits - 2.39


Management Analysis

Background check of promoters & directors
Web search returned anything fishy.
Management Succession Plans
Most of the board members are close family.
Salary of promoters vs net profits
 
Project execution skills
Production capacity not mentioned in latest AR. It was mentioned until 2014.
Consistent increase in dividend payments
 
Promoter share holding
61.09%
Promoter buying the shares
Sep - 2016 - 59.83% Dec - 2016 61.09%
FII holding
No
Government Influence
No

Margin of Safety

MoS in Purchase Price
Earnings Yield - 7.68%
MoS in Business Model
CFO - 32.19
Capex - 18.75 (10yrs)
FCF - 1.71

Credit Rating

Credit Rating History
BBB

Please have a look and provide your views. 

Thanks,

Jayaprakash

Author’s Response


Hi Jayaprakash,

Thanks for sharing the analysis of Vikram Thermo (India) Limited with us! We appreciate the hard work put in by you in the analysis.

Let us analyse the past financial performance of Vikram Thermo (India) Limited over last 10 years (FY2007-16):

Analysis equity research report Vikram Thermo (India) Limited, pharmaceutical excipients, brands, DRUGCOAT, DRCOAT, DPO

Vikram Thermo (India) Limited has been growing its sales since last 10 years (FY2007-16) at a moderate pace of about 10-15% year on year. However, since last 5 years, the sales growth has slowed down a lot and the company has hardly achieved a growth rate of about 2% during FY2012-16.

The key reason for the muted growth has been the revenue de-growth witnessed by the company during FY2015 when the revenue of the company declined from ₹43 cr. in FY2014 to ₹37 cr. in FY2015. The management of Vikram Thermo (India) Limited has cited the global slowdown as one of the key reasons for the decline in revenue during FY2015.

The company has communicated the same to its shareholders during FY2015 annual report: Director’s report, page 9:
“During the current year under report the Indian economy witnessed challenges on account of global depression and the business confidence index was at low ebb. Despite all out efforts of the company management, the company’s operations have resulted in lower revenue of Rs.37,21,27,483/- (Previous year Rs.43,25,21,584/-). This lower revenue has affected the profitability adversely”

This period of FY2012-16 seems to be particularly tough for Vikram Thermo (India) Limited as the company has witnessed its profitability profile undergo a change during this period.

In the past, during FY2007-11, Vikram Thermo (India) Limited had reported near stable operating profit margin (OPM) of about 20% with a few percentage points variation year on year. Such stable profitability margins are good for any company because the stable margins indicate that company has the ability to pass on the raw material prices to its customers. Such companies are expected to have a competitive advantage in their business.

However, since FY2012, the profitability margins have started fluctuating wildly. OPM first rose to 26% in FY2012 and then declined to 14% in FY2015 and have now recovered to 20% in FY2016. Such cyclical OPM indicates that the current contracts of the company with its end consumer might not have the cost pass on clauses and therefore, its profitability margins depend a lot on the raw material prices movements.

A look at the cost of raw material (RM) as percentage of sales revenue would indicate to the customer that the company, which used to have a constant RM to Sales % until 2010 have later on started witnessing significant fluctuation in the RM as cost of sales.

Analysis equity research report Vikram Thermo (India) Limited, pharmaceutical excipients, brands, DRUGCOAT, DRCOAT, DPO

The above graph indicates that the composition of raw material to sales used to be about constant at about 50% until FY2010 indicating that the company could pass on the changes in the raw material prices to its customers. However, since FY2011 onwards, the RM as % of sales have been varying from 50 to 65% in a cyclical manner. Such fluctuations indicate that the company might have lost its ability to pass on the changes in the raw material prices to customers.

Vikram Thermo (India) Limited has highlighted the same to the shareholders in its FY2016 annual report, Management Discussion & Analysis section, page 41:
Risk and Concern: 
The company’s raw materials are based on petrochemicals. Major fluctuations in the petroleum products can affect the company’s performance. 
The change in the pattern of the OPM indicates that either the earlier contracts allowing for passing on the raw material cost changes are no longer in force or the new customers for the company are not willing to have such contracts. Anyway, fluctuating OPM seems to be the new norm for Vikram Thermo (India) Limited now. A look at the OPM for last 10 quarters reaffirms this pattern.

Analysis equity research report Vikram Thermo (India) Limited, pharmaceutical excipients, brands, DRUGCOAT, DRCOAT, DPO

The net profit margin (NPM) has also followed the same pattern as OPM. NPM used to be stable at 9-10% until FY2011 and has witnessed fluctuations since then.

Vikram Thermo (India) Limited has been paying taxes at a rate, which is similar to the standard corporate tax rate in India, which is a good sign.


An investor would notice that the net fixed asset turnover ratio (NFAT) of Vikram Thermo (India) Limited, which has increased from 2.14 in FY2009 to 4.70 in FY2014 has now been declining since last two years and has reduced to a level of 2.84 in FY2016. The primary reason for the decline in NFAT seems to be the capital expenditure (capex) done by the company during the recent years.

Out of the total capex of ₹19 cr. done by Vikram Thermo (India) Limited in last 10 years (FY2007-16), the major portion ₹13 cr. has been done in recent years since FY2013. This is the same period during, which the sales growth of the company has slowed down by a significant amount.

In absence of the capacity utilization data in the annual report and other sources, it is difficult to assess the utilization levels of its manufacturing units. However, the financial data indicates that the capex being done since last 4 years is now nearly complete as almost the entire amount has been transferred from capital work in progress (CWIP) to net fixed assets (NFA) by FY2016.

Therefore, if the company were facing any capacity constraints in its manufacturing plants, then the same might ease out now.


When an investor analyses the inventory turnover ratio (ITR) of Vikram Thermo (India) Limited, then she would observe that the ITR has declined from 13.7 in FY2011 to 9.6 in FY2016. Such deteriorating performance of the company on ITR leaves a lot of room for improvement.

At the same time, the receivables days of Vikram Thermo (India) Limited have also witnessed sharp increase from 83 days in FY2014 to 133 days in FY2016. An investor would notice that the period of increasing receivables days coincides with the period of slow down of the sales growth for the company.

Deteriorating receivables days along with muted sales growth (including decline in sales in FY2015), indicates to the tough business situation being faced by the company over recent period. At one hand, the company seems to be finding it difficult to generate new orders and at the other hand, it is finding it difficult to collect the money from the orders that it has already supplied.

The customers are delaying receivables to an extent that some of the customers have not paid the company even 180 days after the date of payment becoming due. Moreover, Vikram Thermo (India) Limited acknowledges that it might not be able to recover the money from some of these customers. Therefore, it has also provided for such customers considering them as doubtful.

Analysis equity research report Vikram Thermo (India) Limited, pharmaceutical excipients, brands, DRUGCOAT, DRCOAT, DPO

Looking at the above table, an investor would notice that at March 31, 2016 the amount of receivables, which are pending for more than 180 days since they became due for payment is about ₹2 cr., which is about 50% of the reported net profit of ₹4 cr. for FY2016. This signifies the crucial nature of these receivables.

The significant increase in receivables days from 83 days to 133 days in the last 2 years indicates that the business sourced by the company in recent years might not be of very good quality. Going ahead, an investor should keep a close watch on the receivables position of Vikram Thermo (India) Limited and probably get clarifications from the company in case the receivables position does not improve.


Self-Sustainable Growth Rate (SSGR):


The investor would notice that Vikram Thermo (India) Limited has an SSGR of about 25-35% over the years, which is more than the sales growth rate of 10-15% being achieved by the company in the past.


Upon reading the SSGR article, an investor would appreciate that SSGR being higher than the achieved sales growth indicates that the company can sustain its current sales growth from its internal sources without relying on the fund's infusion from outside in terms of debt or equity.

Over FY2007-16, Vikram Thermo (India) Limited has witnessed its sales increase from ₹14 cr. in FY2007 to ₹38 cr. in FY2016. For achieving this sales growth the company has done an additional capital expenditure (capex) of ₹19 cr.

Vikram Thermo (India) Limited has been able to fulfil the entire requirement of these funds from its internal sources. As a result, along with meeting the capex requirements, the company has been able to reduce its debt from ₹2.4 cr. in FY2007 to ₹0.6 cr. in FY2016.

This assessment of SSGR gets substantiated when the investor analyses the free cash flow (FCF) position of Vikram Thermo (India) Limited.

An investor would notice that Vikram Thermo (India) Limited has generated ₹32 cr. from cash flow from operations (CFO) over FY2007-16 whereas it has spent ₹19 cr as capital expenditure over the same period resulting in a free cash flow (FCF) of ₹13 cr. Moreover, the company has utilized the free cash to pay dividends to shareholders of about ₹7 cr.

SSGR and FCF are two of the main pillars of assessing the margin of safety in the business model of any company.


Sales growth, which has been funded entirely from internal sources and the associated debt reductions seems to have been taken positively by the market and the market has rewarded the company and its shareholders handsomely over the past years.

The company could achieve an increase in market capitalization of about ₹65 cr. over FY2007-16 versus the earnings retained and not distributed to shareholders of about ₹27 cr. indicating that a market value of about ₹2.41 has been created by the company for its shareholders for each ₹1 of earnings retained by it over the years.

Upon analysis of Vikram Thermo (India) Limited, the investor notices multiple other aspects, which deserve attention:

1) Increasing promoter’s stake:


Over last few years, the promoters have been steadily increasing their stake in the company. Promoter’s stake has increased from 53.28% at March 31, 2010 to 61.12% at March 31, 2017.

Rising promoter’s stake is a positive parameter while assessing any company.

2) Promoter’s remuneration being higher than the statutory ceiling:


As rightly mentioned by you, the remuneration of promoter directors for FY2016 is ₹65 lac, which is higher than the statutory ceiling, which as mentioned by the company is about ₹42 lac. However, it seems that the company has taken the requisite approval from the central govt. for giving this remuneration to the promoter directors.

As per the independent auditor’s report in the FY2016 annual report, page 46:
“According to the information and explanations give to us and based on our examination of the records of the Company, the Company has paid/provided for managerial remuneration in accordance with the requisite approvals mandated by the provisions of section 197 read with Schedule V to the Act.”
Moreover, if the investor analyses the related party transactions section of the FY2016 annual report, page 62, then she would notice that the total remuneration taken by the promoters and their relatives from the company is about ₹1.5 cr.:

Analysis equity research report Vikram Thermo (India) Limited, pharmaceutical excipients, brands, DRUGCOAT, DRCOAT, DPO


Vikram Thermo (India) Limited is currently available at a P/E ratio of about 15-16, which does not offer any significant margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.


Overall, Vikram Thermo (India) Limited seems to be a company, which was enjoying good sales growth along with stable profitability margins over the first half of last 10 years (FY2007-16). However, since last 4-5 years, the company has been facing tough times including sales degrowth in FY2015, fluctuating profitability margins, deteriorating inventory management efficiency, difficulty in collecting cash from customers etc. The company’s customers have been delaying payments and Vikram Thermo (India) Limited has even had to write off some of the receivables.

Vikram Thermo (India) Limited has been doing capital expenditure since last 3-4 years, which now it seems to have completed. The completed capex should help the company in achieving future growth.
The company has been paying remuneration to promoters, which is higher than the statutory ceiling. However, if the investor analyses the remuneration of individual promoter directors, then she would notice that the remuneration is about ₹20-30 lac per annum per director. This is a modest level of remuneration on absolute basis as currently, ₹20-30 lac is the starting corporate salary for any tier A business school graduate in India.

The key monitoring factor for any investor in Vikram Thermo (India) Limited would be to assess the working capital management going ahead especially collection of receivables from the customers. We have noticed that the receivables overdue for more than 180 days are about 50% of the reported profits for FY2016 and non-collection of the same would be detrimental to the economic interest of the shareholders.


These are our views about Vikram Thermo (India) Limited. However, you should do your own analysis before taking any investment related decision about Vikram Thermo (India) Limited.

You may use the following steps to analyse the company: "How to do Detailed Analysis of a Company"

Hope it helps!

Regards,


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  • The financial table in the above analysis has been prepared by using my customized stock analysis excel template which is now compatible with screener.in. This customized Excel template is now available for download as a premium feature. For further details and download: Click Here
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DISCLAIMER


Registration Status with SEBI:


I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013

Details of Financial Interest in the Subject Company:



Currently, I do not own stocks of the companies mentioned above in my portfolio.