This article provides a fundamental analysis of Makers Laboratories Ltd (Makers Lab), an Indian pharmaceutical player focusing on branded generics like Duramol (Paracetamol), Artemak-AB (α-β Arteether), Loroquin (Chloroquine), Nimuwin (Nimuselide), Coffwin (Anti cough Range) and Exylin (Amoxycillin range).
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
Makers Lab Research Report by Reader
Q: I am planning to invest in Makers Lab, but have a mixed feeling and not able to make up my mind whether it is going to be a good investment. I find it to be a good stock to invest. It will be helpful if you can share your thoughts on the same.
There two reason I like Makers Lab for investment:
- Makers Lab and IPCA are related. In fact IPCA`s 0.1 % shares are owned by Makers Lab. Both have almost same promoters, same management and board. Makers Lab is into the business of generic API`s formulation, which is a stable business and is not affected by any market events or economic growth or any USFDA approval or disapprovals.
- The available equity is so low that anyone buying only 5000 shares will own 0.1 % of the company. Just as a stretch of imagination, if the IPCA promoters choose to write the same growth story for Makers Lab, in very long term where this company can go. It took IPCA Laboratories Ltd 15 years to become a INR 10,000 crore company from a INR 100 crore company. Makers Laboratories is just INR 25 crore now, even a 100 times jump will make it only INR 2,500 crores company in very long term, which is very easily attained by ordinary Pharma companies like Natco, Indoco remedies, Suven , Sashun chemical, Shilpa lab, Marksans Pharma etc. who have turnover of only INR 500-600 crores.
How much of this actually happens, only time will tell, but in short term too, at least Rs. 100 is very much possible, only as a rerating.
Dr Vijay Malik’s Response
Thanks for writing to me! First, let us see how Makers Lab has performed in the past.
Financial Analysis of Makers Lab:
Makers Lab has not shown any promising performance over last decade (2005-14). Sales have grown at meager 6-7% per annum, which is not a good growth rate in a moderately high inflation economy.
Profitability margins are very poor. Operating profitability margins (OPM) have fallen from 12% in FY2010 to meager 3% in FY2014. Net profit margins (NPM) have declined from 6% in FY2012 to 1% in FY2014. Company even reported losses in FY2012. These are not the desirable features of an investment.
Deteriorating Receivables Position of the Company:
Makers Lab is not able to collect cash from its customers in a timely manner. Receivables days have increased from 45 days in FY2011 to 60 days in FY2014. Delay in realization of receivables leads to stretching of the working capital cycle of the company and brings in suboptimal utilization of company’s resources.
Operating Efficiency Analysis of Makers Lab:
Asset turnover of the company has declined from 16.1 in FY2008 to 5.7 in FY2014. It indicates that company used to produce goods worth sales value of INR 50 cr. from assets of INR 3 cr. in FY2008 whereas in FY2014, its assets of INR 12 cr. (300% increase) produce goods worth sale value of INR 68 cr. (36% increase). These numbers do not reflect efficient utilization of incremental investment in company’s assets.
Overall, Makers Lab does not seem to be an exciting business when looking at its past financial performance.
If an investor believes that management of another company (say IPCA) can be a factor for future good performance of Makers Lab, then the investor should analyse whether the past financial performance of last decade is under the same management. If it is the same management, which has produced suboptimal results in the past, then believing that suddenly the existing management would create some miracle and turn the company around, then it might amount to wishful thinking. However, if there is some change in management is expected, then this change can be one reason to discount the past performance and look at things from fresh perspective.
Companies become 10, 20, 100 baggers when they perform well and grow their business many fold. Merely continuing in business with dismal performance may not be a sound basis to assume that companies would create huge wealth for investors.
Rerating mostly happens as a result of unrecognized good performance or any change in business environment. If any radical change is expected in Makers Lab, then an investor may wish that it might be rerated. Looking at the past performance, chances of rerating of Makers Lab look remote.
Stock markets are known for surprising investor and can do anything in future. One may see share price of Makers Lab zooming to higher levels. However, the past performance of the company do not provide promising outlook.
Also Read: Hidden Risks of Investing in High P/E Stocks
This is my assessment of financials of Makers Lab. You should take any investment decision about Makers Lab only after doing your own analysis.
You may use the following steps to analyse the company: “How to Conduct Detailed Analysis of a Company“
Hope it helps!
- To know about the stocks in our portfolio, you may subscribe to the premium service: Follow My Portfolio with Latest Buy/Sell Transactions Updates
- To learn our stock investing approach “Peaceful Investing” by videos, you may subscribe to “Peaceful Investing” Workshop-on-Demand
- To download our customized stock analysis excel template: Click Here
- Learn about our stock analysis approach in the e-book: “Peaceful Investing – A Simple Guide to Hassle-free Stock Investing”
- Read more company analysis in the e-book series: Company Analyses
- To register for our upcoming full-day “Peaceful Investing” workshop teaching in-depth fundamental analysis & portfolio management: Click Here
- To pre-register free/express interest for an investing workshop in your city: click here
- 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.