Analysis: Kilitch Drugs (India) Limited

Modified on August 30, 2018

This article provides fundamental analysis of Kilitch Drugs (India) Ltd an Indian pharmaceutical company manufacturing all dosage forms i.e. solid, liquid and parenteral forms. Kilitch Drugs focuses on antibacterial parenteral formulations and sterile liquid formulations in small volumes. Kilitch Drugs also does contract manufacturing for national and multinational pharmaceutical companies.

 

Kilitch Drugs (India) Ltd

Q: Dear Vijay. First of all, a big appreciation for sharing your stock selection & analysis articles. I came across them few weeks back and learnt many a things. I was looking for undervalued stocks in Pharma sector and came across Kilitch Drugs (India) Ltd.

I feel this is a undervalued stock on the below rationale:

  • Market Cap is almost equal to cash holding of the company
  • High promoter shareholding (>60%)

I feel the share price has been beaten down because of poor results for last few quarters. Two year back they sold one of their divisions and paid 300% dividend to shareholders. Their annual report says they are revamping and focusing on exports to African countries where they see huge potential.

I look at it not as a very long-term investment but 1-2 years should give around 2-3x. What is your view on it?

 

Author’s Response

Thanks for your feedback and appreciation! I am happy that you found the articles useful. Analysis of financials of Kilitch Drugs (India) Ltd present quite a few interesting observations.

 

Financial Analysis of Kilitch Drugs (India) Ltd:

Kilitch Drugs (India) Ltd equity analysis research report

 

Non-Utilization of Cash/Shareholder’s Funds Properly: 

Kilitch Drugs (India) Ltd sold its Ponta Sahib plant to US firm Akorn in FY2012 for cash consideration of about INR 200 cr. However, it paid out dividend of only INR 33 cr. The use of balance amount is not yet clear.

There is no increase in net fixed assets or capital work in progress (CWIP), therefore, it seems they are not spending it on building their manufacturing plants. Its cash balance has become INR 44 cr. only at FY2014 end, after about two years of concluding the sale to Akorn. The trend of cash flow from investing (CFI) indicates that Kilitch Drugs (India) might be getting money from Akorn in tranches. An investor needs to check about the receipt of money and its usages by the company.

Operating Losses: 

Company’s sales have dipped since sale of plant to Akorn, however, it does not entirely explain operating losses since last two years. An investor needs to understand whether the remaining drug portfolio is an undesirable collection of products.

Similarly, net profits have taken a hit in line with operating losses.

Operating Efficiency Analysis of Kilitch Drugs (India) Ltd: 

Kilitch Drugs (India) is not performing well on the operating efficiency parameters. Inventory turnover and other parameters are not showing promising trends.

It seems Kilitch Drugs (India) is finding difficulty to recover its dues from customers. Its receivables days outstanding are increasing continuously and currently stand at whopping 258 days. It indicates that its customers are enjoying funds at the cost of Kilitch Drugs (India) & its shareholders. An investor needs to understand the reasons behind increasing receivables days.

Cumulative PAT vs. CFO analysis would not be very meaningful in case of Kilitch Drugs (India) as the profits from sale of plant to Akorn would be shown in PAT but the cash would be shown in cash from investing & not as CFO. However, the CFO being negative is still significant as it indicates that company’s cash is being stuck in working capital.

Erosion of Shareholder’s Wealth: 

Over last 10 years (2005-14), Kilitch Drugs (India) has withheld profits (retained earnings) of INR 89 cr. However, the increase in market capitalization during the same period is only INR 36 cr. This indicates that the company has not been able to generate wealth for its shareholders from the money it decided to withhold and not distribute as dividends. Effectively, shareholder’s wealth of INR 63 cr has been destroyed indicating INR 0.40 of wealth creation for every INR 1 of profits retained. This is not a desirable feature of any investment.

Margin of Safety in the market price of Kilitch Drugs (India) Ltd: 

At current price to earnings ratio (P/E ratio) of 35, Kilitch Drugs (India) Ltd offers no margin of safety to an investor. As per Benjamin Graham, an investor should strive for keeping a margin of safety while buying stocks.

Read: 3 Simple Ways to assess the Margin of Safety in a Stock

Also Read: Hidden Risks of Investing in High P/E Stocks

Overall, Kilitch Drugs (India) Ltd represents a story where a company sold its marque asset and has not yet recovered fully/utilized cash properly. Operating efficiency seems to be declining. Existing shareholders have reasons for being unhappy.

You mentioned that the company is revamping its operations and focusing on exports to African countries. However, the analysis of fixed assets and capital work in progress (CWIP) does not corroborate the management’s claim.

An investor must analyse the usage of cash received from asset sale to Akorn before making up her mind about investing in Kilitch Drugs (India) Ltd.

I believe that in current market there are many other good investment opportunities, even after considering that Kilitch Drugs (India) has cash reserves of almost equal to its current market capitalization. History has shown that companies do not take long before destroying cash reserves by resorting to “Diworsification

You may read a case of repeated diversification attempts ending in “Diworsification” here: Analysis: Bodal Chemicals Ltd

I do not look at any company for 1-2 years horizon. I agree with Warren Buffett when he says that an investor should look at stocks as investments for decades and never less than 5 years.

You may read more about my review of Warren Buffett’s teachings here:

Warren Buffett’s 2014 Letter: A Complete Book for Investors

These are my views about Kilitch Drugs (India) Ltd. You should do your own analysis before taking any investment decision in Kilitch Drugs (India) Ltd.

You may use the framework described in the article on detailed analysis of a company to build upon the analysis done by you earlier:

How to Conduct Detailed Analysis of a Company

Hope it helps!

Regards,

P.S.

 

DISCLAIMER

  • The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
  • I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
  • Currently, I do not own stocks of the companies mentioned above in my portfolio.

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