The current article of “Analysis” series covers Albert David Ltd, a Kolkata based Indian pharmaceutical manufacturer producing acute therapy drugs and human placenta extract based medicines under the brand “Placentrex”.
“Analysis” series is an attempt to share with all the readers, our inputs to the company analysis submitted by readers on the “Ask Your Queries” section of our website.
In order to benefit the maximum from this article, an investor should focus 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.
Albert David Ltd Research Report by Reader
About Albert David Ltd:
It has a pharmaceutical formulation & bulk drug manufacturing unit at Kolkata, infusion solution & oral solids unit at Ghaziabad, disposable syringes & needles unit at Mandideep, and herbal formulation at Bangalore units.
Business Analysis of Albert David Ltd.
Let us look at the key attributes:
- Albert David Ltd exports these products to South East Asia, Middle East, Europe, US, Latin America. However, exports are less than 10% of the revenue.
- The flagship product is “Placentrex” – used for treating pelvic inflammatory disease (PID), wound healing and tissue regeneration. It is the only manufacturer in India of the said product. As per the annual report, Govt. had put a ban on sales of this product. Therefore, it seems there are regulatory issues.
- Albert David Ltd also has offerings in laxative, vitamins, anti-oxidants and herbal segment. Other brands are:
- Evict – Laxative
- Sioplex – vitamin
- Siooxy – antioxidant
- Herbal product
- The major business is the formulation
- Large volume Injectable contributes 33% of sales
- Liquid contributes 15% of the sales
- Albert David Ltd has over 2,000+ stockists and 16 sales depots across India. The marketing team has 650 people and 500 marketing representatives (MR).
- Its products are GMP compliant. As per the AIOCD, it is amongst the top 100 (>50) firms in India. It has a strong presence in the North and Eastern part of the country.
- In terms of sales, its rank has slipped to 57th.
- Good cash accrual and no major debts. In addition, it did not use the entire bank credit limit – indicating a good liquidity position.
- Placentrex and Alamin are high margin molecules.
- In 2016, Albert David Ltd received good money from the sale of its Actibile brand. Part of the funds may be used for marketing or meeting any exigencies. No capex.
- Actibile brand contributed 5%of the sales.
- Limited product profile, intense competition in the market
Management Analysis of Albert David Ltd
- All the promoter group members in management are aged.
- Albert David Ltd is part of the Kothari group and they have inducted Mr T.S. Parmar (ex-Jubilant science president) as CEO. Generally, promoters bringing in professional management is a good sign – but it remains to be seen how good it would be.
- 1st Jan 2018, the company has closed its Mandideep operation.
- Promoters’ shareholding is 60.9%.
Financial Analysis of Albert David Ltd
- Topline growth has been 8% in the last 10 years and last 5 years <5% and especially post the sale of Actibile brand, sales have decreased further.
- Keeping aside the one-time effect of sales, the overall net profit has remained stagnant at ₹12 cr over 2014 – 2017 period. In 2018, PAT is ₹9.84 cr.
- Operating profit margin (OPM) for Albert David Ltd has come under pressure and has even fluctuated in recent years. OPM is currently below 10%. Therefore, it is evident that the company is under pressure in both top and bottom line.
- The return on equity has suffered too and currently, it is around 10%.
- Let’s look at the cash generation capacity of Albert David Ltd:
- Over the last 10 years, it generated ₹98 cr of PAT (excl. exception item) against this they have generated CFO of ₹190 cr. Of course, the depreciation cost etc. would be real so the numbers will not match, but the ability to generate cash provides a margin of safety to the business.
- Over the years, Albert David Ltd has paid dividends of close to ₹23 cr. This further helps in establishing that cash generation is real.
- The D/E is low and manageable.
- Receivable days are around 40 days for the last few years.
- Inventory turnover ratio is around six.
- Overall, in the financials, apart from growth no major red flag.
Points to note:
- Its sale of Actibile brand is shown as a part of CFO. I believe this is not a correct recognition.
- In 2015, Albert David Ltd has invested in Bharat Fritz Werner Limited, a group company. I am not sure how Albert David Ltd is going to benefit from this.
- It is operating in a limited market.
- So far, past growth has not been very encouraging. Management changes may bring some focus. However, I do not see any major trigger.
- Albert David Ltd provides very limited information.
Valuation Analysis of Albert David Ltd
Given that Albert David Ltd is going through a transition phase, it is difficult to value the business purely on the PE multiples etc. However, it is important to make sure that one is not overpaying.
- Market capitalization (A): ₹223 cr.
- Debt (B): ₹27 cr
- Cash + Investment (C): ₹73 cr
- Net (D = A +B –C): ₹177 cr.
- FY’18 PAT = ₹9.84 cr
PE ~18 times its current year’s earnings but are not steady-state earnings and valuation have a slight upward bias.
Conclusion:
Overall, the positives are a professional management team. However, no positive triggers visible yet.
Disclaimer:
This is not a buy or sell recommendation report and the purpose of this note is to learn about the business of the company.
Dr Vijay Malik’s Response
Hi Vaidoorya,
Thanks for sharing the analysis of Albert David Ltd Limited with us! We appreciate the time & effort put in by you in the analysis.
Let us analyse the performance of Albert David Ltd over the last 10 years.
Financial Analysis of Albert David Ltd:
While analyzing the financials of Albert David Ltd, an investor would note that in the past (FY2009-18), the company has been able to grow its sales at a moderate rate of 4-5% year on year. Sales of the company increased from ₹181 cr. in FY2009 to ₹287 cr in FY2018. The growth in the sales of the company has not been smooth. The company witnessed its sales decline in the past two years from ₹320 cr. in FY2016 to ₹287 cr. in FY2018.
One of the reasons for the recent decline in the sale of Albert David Ltd has been the sale of brand Actibile to Zydus Healthcare in FY2016. At the time of its sale, Actibile used to constitute about 5% of the sales. Therefore, an investor would expect the sales of the company to decline by about 5% after the sale of Actibile. However, an investor would notice that in the last 2 years, the sales of the company have declined by about 9-10%. Therefore, investors would appreciate that over and above the sale of Actibile, there are other factors, which have influenced the sales of the company.
On similar lines, an investor would notice that during FY2009-15, the operating profit margin (OPM) of Albert David Ltd was consistent within the range of 10-13%. However, in recent years, the OPM has declined sharply from 12% in FY2015 to 6% in FY2018. An investor would note that the company reported the commencement in the decline in OPM in FY2016, the year in which it sold Actibile to Zydus. However, the investor would also note that the company sold Actibile in the month of March 2016, which is the last month of the financial year.
Albert David Ltd has informed BSE that Albert David Limited (ADL) has entered into Agreements dated March 28, 2016 with Zydus Healthcare Limited (a wholly owned subsidiary of Cadila Healthcare Limited) for the sale of ADL’s brand ‘Actibile’ with a free and marketable title along with all business information, know how and the trademarks associated with the brand for the following territories: (i) the Union of India; (ii) Nepal, (iii) South America (excluding Peru and Colombia), (iv) The United States of America; (v) Japan, (vi) South Africa; (vii) the European Union; and (viii) East Europe, for a lump sum consideration of Rs. 55.00 crores.
Therefore, even though the investor may get the initial impression that the decline in OPM may be the absence of Actibile, which may be a high margin business, there seem to be other parameters, which have affected the business of Albert David Ltd.
The company has intimated its shareholders in FY2018 (page 5) that the decline in its business performance is primarily a result of demonetization and the introduction of goods & services tax (GST).
In the last two years we have witnessed two major initiatives by the Government of India – demonetization and introduction of GST, the largest indirect tax reform in India since Independence. Both these landmark reforms are expected to be major game changers in the mid to long term…..
Like the other industries, the Indian Pharma industry too was temporarily negatively impacted by the GST transition, with the maximum impact in the ‘April-June’ quarter. Albert David Limited too experienced this hit but we have bounced back strongly in the subsequent quarters.
Further advised reading: Understanding the Annual Report of a Company
An investor would appreciate that over the last two year, FY2016-18, the two major changes of demonetization (2016) and the introduction of GST have brought in a major shift in the manner of business conduct. Therefore, it is normal for any business to cite them as a reason for declining business performance. However, investors should always look beyond these two factors, whenever, they analyse the decline in the business performance of any company during the crucial period of these two years, FY2016-18. This is because, many times, businesses may be able to hide poor business performance due to other weaknesses under the pretext of the impact of demonetization and introduction of GST.
While looking at the decline in the OPM, an investor would notice that the sharp decline in the OPM in FY2016 was before the period of demonetization. Therefore, investors would appreciate that some additional factors are responsible for the decline in profitability.
Investors would appreciate that in the June 2017 quarter, due to the impending introduction of GST, most of the dealers/retails of all the companies resorted to destocking of goods. This led to a decline in the business performance of most of the companies. However, the business impact disclosed by Albert David Ltd was very substantial. In June 2017 quarter, Albert David Ltd reported an operating loss with an OPM of negative 21%.
The impact of such events on Albert David Ltd has been far more than anticipated. The credit rating agency, CRISIL, has highlighted it in its credit rating rationale of the company for Sept 2017:
ADL reported a weaker than industry performance in the first quarter of fiscal 2018, even as other pharmaceutical companies’ sales and profitability too were affected on account of destocking by primary dealers in anticipation of GST implementation. ADL’s revenue declined 33% y-o-y (6% decline for corresponding quarter last year) while reporting negative 21% operating margin (8% in the corresponding quarter last year). Further, even in fiscal 2017, the company’s operating margin declined higher-than-anticipated; margin in fiscal 2017 was 8.6% vis-à-vis 10.0% in fiscal 2016. CRISIL had expected a decline in operating margin consequent to sale of high margin Actibile brand in the last quarter of fiscal 2016; however the decline was higher, partly on account of demonetization driven impact on demand.
While analysing the publicly available information about Albert David Ltd, an investor would notice that the company operates in highly competitive short therapy segments, where there is very high competition from both organized as well as unorganized players. The company has disclosed the same to its shareholders in its FY2018 annual report, page 61:
“The pharmaceutical industry in India, however, is an extremely highly fragmented market with severe price competition from large number of small scale manufacturers leading to mis-matched, complex competitive scenario.”
Further advised reading: How to do Business Analysis of Pharmaceutical Companies
It seems that the competition faced by the company from unorganized players has affected its business very severely recently as the unorganized players are fighting for the survival of their business. An investor may appreciate the extent of the competition and its influence on the company when she reads that the company has decided to close down one of its manufacturing facility, as it had become unviable. This facility used to produce syringes and needles, which are essential medical items but face high competition from unorganized players. From corporate announcement to Bombay Stock Exchange, dated Dec 27, 2017:
The unit became financially unviable when the company could not recover the production cost of the syringes & needles from its sales price. As per FY2018 annual report, page 119, the company had to spend more than ₹9 cr. on the Mandideep plant to generate the sales of ₹3.5 cr. from it in FY2018.
Further advised reading: Understanding the Annual Report of a Company
CRISIL acknowledged this intense competitive scenario in its Sept 2017 credit rating rationale for Albert David Ltd:
ADL’s product portfolio is largely restricted to acute therapeutic segments such as anti-bacterials, anti-infectives, and placental extracts. This exposes the company to intense competition from other players, which constitute a major portion of the market.
As a result, CRISIL changed its rating outlook for the debt of the company from “Positive” to “Stable” in Sept 2017.
CRISIL has revised the outlook on the long-term bank facilities of Albert David Limited(ADL) to ‘Stable’ from ‘Positive’. The ratings on the bank facilities have been reaffirmed at ‘CRISIL A-/CRISIL A1’.
The revision in outlook factors in CRISIL’s expectation that the earlier anticipated improvement in ADL’s operating performance would take considerably longer given the challenges associated with demand from channel partners. CRISIL now expects the revenue to grow at 5-6% per annum, slower than earlier expected, over the medium term,
At this point, investors should note that many times, downwards change in the outlook is the precursor to a downgrade in the credit rating of any company. It might be one of the reasons that Albert David Ltd has stopped cooperating with CRISIL in its review of credit rating in Sept 2018:
CRISIL is, however, awaiting adequate information from Albert David Limited (ADL) which will enable us to carry out the rating review. CRISIL will continue provide updates on relevant developments from time to time on this credit.
CRISIL also identifies information availability risk as a key credit factor in the rating assessment as outlined in its criteria ‘Information Availability Risk in Credit Ratings’.
Further advised reading: Credit Rating Reports: A Complete Guide for Stock Investors
Therefore, investors should approach the company to seek clarifications about the reasons for such adverse comment from the credit rating agency. Investors should keep a watch on any further rating communication from CRISIL about the company. Investors should also monitor whether the company resorts to “credit rating shopping” and changes its credit rating agency to some other company in order to avoid a rating downgrade or to get a higher credit rating.
The net profit margin (NPM) of Albert David Ltd has been following the trend of OPM except in FY2016 when the NPM is higher than OPM because of significantly high other income from the sale of the brand Actibile to Zydus.
The tax payout ratio of Albert David Ltd has been in the range of 34-35%, which is in line with the corporate tax rate applicable to companies in India. In FY2016, the tax payout ratio of the company declined to 24%, which may be due to the different tax treatment of sale proceeds of Actibile. An investor may contact the company to get further clarification on the same.
Further advised reading: How to do Financial Analysis of Companies
Operating Efficiency Analysis of Albert David Ltd:
When an investor analyses the net fixed asset turnover (NFAT) of Albert David Ltd, then she notices that the NFAT of the company has witnessed consistent improvement over the years from 2.71 in FY2009 to 6.81 in FY2016. The increase in NFAT indicates efficient utilization of existing manufacturing capacities by the company and may indicate the role of operating leverage.
An investor notices that the NFAT of the company has declined in the last two years to 3.39 in FY2018. One of the reasons for the decline in NFAT is the decline in the sales revenue in the last two years. However, another key reason is the increase in net fixed assets in FY2017. The increase in fixed assets in FY2017 is due to the revaluation of the land assets by the company when it changed its accounting from GAAP to IndAS in FY2017.
As per the FY2018 annual report, page 136, the company has increased the value of its land assets by about ₹34 cr on the adoption of IndAS.
The Company have considered fair value for property, viz land admeasuring over 7.46 acres, situated in India, with impact of Rs. 3391.46 lacs in accordance with stipulations of Ind AS 101 with the resultant impact being accounted for in the reserves.
An investor would appreciate that the increase in the denominator of fixed assets while calculating the NFAT will decline when any company revalues its assets to a higher value.
Read on: How to Assess Operating Efficiency of Companies
An investor would note that the inventory turnover ratios (ITR) of the company has been stable within the range of 6-6.5 over the years indicating that the company has been able to manage its inventory position well.
Over the years, Albert David Ltd has been able to keep its receivables days under control. An investor would notice that the company has reported receivables days within the range of 38-45 days over the years. It indicates that the company has been able to collect the money from its customers in time.
Further Advised Reading: Receivable Days: A Complete Guide
The ability of the company to keep its working capital efficiency within control by keeping ITR and receivables days under check indicates that the company has been able to convert its profits into the cash flow from operations without the money being stuck in working capital. An investor observes the same while comparing the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of the company for FY2009-18.
An investor would notice that over FY2009-18, Albert David Ltd Limited has reported a total cumulative net profit after tax (cPAT) of ₹145 cr. whereas during the same period, it reported a cumulative cash flow from operations (cCFO) of ₹260 cr indicating that it has converted its profits into cash.
Further advised reading: Understanding Cash Flow from Operations (CFO)
An investor would note that in FY2016, Albert David Ltd has shown the proceeds of ₹53 cr. received from the sale of the brand “Actibile” to Zydus Healthcare, in the cash flow from operations (CFO). FY2016 annual report, page 75:
If an investor deems fit, then she may adjust the CFO calculations by removing the sale proceeds of ₹53 cr. from CFO and put it under cash flow from investing (CFI).
Read: How Companies Manipulate Cash Flow from Operating Activities (CFO)
In such a situation, the cCFO over FY2009-18 will decline from ₹260 cr. to ₹207 cr. However, even in such a situation, the cCFO over FY2009-18 is more than cPAT over the same period. Therefore, it seems that Albert David Ltd has been able to manage its working capital efficiently during FY2009-18.
Margin of Safety in the Business of Albert David Ltd:
Free Cash Flow Analysis of Albert David Ltd:
While looking at the cash flow performance of Albert David Ltd, an investor notices that during FY2009-18, the company had a cumulative cash flow from operations of ₹260 cr. However, during this period it did a capital expenditure (capex) of ₹85 cr. (Please note that while calculating the capex we have made adjustments for years FY2015 and FY2017. In FY2015, the company showed disposal of a lot of assets and in FY2017, the company revalued its land assets. Both these event impact the calculation of capex. During these years, we have used the inputs from the annual report in these years to adjust the data).
Albert David Ltd could meet the entire capex from its own sources. As a result, it had a free cash flow (FCF) of ₹175 cr (= 260-85) over FY2009-18. In addition, the company had a non-operating/other income of ₹85 cr. over the same period.
As a result, the company did not need to raise any debt for meeting its capital expenditure plans. It could use the free cash available with it to pay dividends to shareholders and still left with surplus funds. Over FY2009-18, the company could reduce its debt from ₹58 cr in FY2009 to ₹28 cr. in FY2018. In addition, it had cash & investments of about ₹94 cr. on March 31, 2018.
Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF
Free cash flow (FCF) is one of the main pillars of assessing the margin of safety in the business model of any company.
Further advised reading: 3 Simple Ways to Assess “Margin of Safety”: The Cornerstone of Stock Investing
Additional aspects of Albert David Ltd
On analysing Albert David Ltd, an investor comes across certain other aspects of the company:
1) Management Succession:
While analysing the past annual reports of Albert David Ltd, an investor notices that Mr. A. K. Kothari, a member of the promoter family, heads the company as Executive Chairman. Mr. Kothari is currently about 65 years of age. However, investors do not find any member of the next generation of the promoter family on the board.
Over the years, the senior management of the company seems to consist of non-promoters. Mr. H. P. Kabra, Executive Director, retired from the company on March 31, 2018, after working for the company for 44 years. He seems to have handed over the charge of leadership to Mr. T. S. Parmar. The company has recently hired Mr. Parmar and appointed him as MD & CEO of the company.
Further advised reading: Are professionally managed companies safer for shareholders?
Going ahead, in order to understand more about succession planning, investors should monitor whether any young member from the Kothari family joins the board. In addition, the investor may contact the company to know if any of the younger members of Kothari family is already working in the company at a junior or middle management position and whose name is not present in the annual report under key management personnel (KMP).
Further advised reading: Steps to Assess Management Quality before Buying Stocks
2) Loans to promoter group companies:
While analysing the past annual reports, an investor notes that Albert David Ltd has given loans to the group entities belonging to the Kothari group. As per FY2018 annual report of the company, page 149, Albert David Ltd has given loans of about ₹16.65 cr. to the entities of Kothari group:
- ₹15.80 cr. to Kothari Capital & Securities Pvt. Ltd. And
- ₹0.85 cr. to Kothari Medical Centre.
Further advised reading: Understanding the Annual Report of a Company
These are the loans, which Albert David Ltd gave the group entities and are unpaid at the end of the year. Therefore, it is easy to find such loans in different sections of the annual report. However, many times, companies give loans to promoter entities during the year and take back the loan before the end of the year. Therefore, such loans, which are repaid within the year, are not reported at multiple places in the annual report.
In a similar case, in FY2015, Albert David Ltd gave a loan of ₹3 cr. to a related party, which was repaid during the year. However, the company did not mention the same in the section of the related party transactions in the annual report.
An investor gets to know about this loan from the annexure to the report of the statutory auditor of the company. FY2015 annual report, page 63:
The Company has given unsecured loans of Rs.300 Lacs to a Company covered in the register maintained under section 189 of the Companies Act, 2013. The amount of principal and interest thereon has been fully recovered during the year.
FY2015 annual report, page 83: details of the above-mentioned loan are not present in the disclosures of transactions with the related parties:
Further advised reading: How Promoters benefit themselves using Related Party Transactions
3) Investments in the companies owned by the promoter group:
Investors would note that Albert David Ltd has invested about ₹19 cr. in multiple entities of the Kothari group as an equity investment. As per FY2018 annual report, page 104, Albert David Ltd has made the following investments in the shares of Kothari group companies:
- ₹16.75 cr. in the shares of Bharat Fritz Werner Limited
- ₹2.15 cr. in the shares of Kothari Phytochemicals & Industries Limited
Both the above-mentioned companies are a part of the related party companies of Albert David Ltd. FY2018 annual report, page 128, provides the list of related parties of the promoters/directors etc. of Albert David Ltd:
We believe that investors should contact the company to get further clarification about the reasons for these investments and the manner in which these investments benefit the shareholders of Albert David Ltd. This is because, if there is no obvious benefit to the shareholders of Albert David Ltd from these investments, then it might be equivalent to shifting the economic benefits from Albert David Ltd to these companies.
Credit rating agency CRISIL has highlighted these investments as a cause of concern in its rating rationales. In 2015, CRISIL changed the outlook of the debt of the company from “Stable” to “Positive” after getting confirmation from the management that it will not make further investments in the group companies:
CRISIL has revised its outlook on the long-term bank facilities and fixed deposit programme of Albert David Ltd (ADL) to ‘Positive’ from ‘Stable‘, while reaffirming the ratings at ‘CRISIL A-/FA’; the rating on short-term facilities has been reaffirmed at ‘CRISIL A2+’.
The outlook revision reflects CRISIL’s expectation that ADL will sustain improvement in financial risk profile over the medium term, supported by steady accretion to reserve and no major debt-funded capital expenditure (capex)……Liquidity is adequate, supported by negligible term debt obligation and low bank limit utilisation, and will improve over the medium term as the management has confirmed that there will be no further investment in the group company.
However, it seems that the management of Albert David Ltd has continued to make equity investments and loans to different companies of the promoter group. In its communication of Sept 2018, CRISIL has highlighted the exposure to group companies as one of the key rating sensitivities for Albert David Ltd:
The key rating sensitivity factors for the rating include:
– Financial exposure to group companies
– Operating profitability
– Regulatory restriction on sale, if any, of placental extract-based drugs
– Capex plans and their funding
Further advised reading: How Promoters benefit themselves using Related Party Transactions
4) Taking over the risk of / supporting promoter group companies:
When an investor analyses the related party transactions done by the company in the previous years, an investor notices that the company had provided a guarantee to a lender for loans of ₹35 cr. taken by one/more of the promoter group entities in FY2014.
FY2014 annual report, page 57:
Investors should note that when Albert David Ltd gives a corporate guarantee to a lender for a loan taken by any other company, then the ultimate risk of the repayment of the loan lies with Albert David Ltd. In case, the other company is not able to repay the loan, then lenders will hold Albert David Ltd accountable for repayment of the loan and may initiate legal recovery proceedings against Albert David Ltd if it does not repay the loan taken by the other company. Therefore, in the case of such corporate guarantees, the risk is born by the guarantor while the real economic benefits of the loan proceeds are enjoyed by the entity taking the loan.
As per later developments disclosed in the FY2018 annual report, the lenders have released the corporate guarantee in FY2018. It might be a result of the repayment of the loan by the related party or some other company may have given the corporate guarantee to the lender in place of Albert David Ltd.
Further advised reading: How Promoters benefit themselves using Related Party Transactions
5) Donations to related parties:
While analysing the related party transaction disclosure of Albert David Ltd over past years, an investor notices that every year, the company pays out a few crores to promoter group entities as donations.
e.g. FY2018 annual report, page 129:
Further advised reading: Understanding the Annual Report of a Company
Over FY2012-18, Albert David Ltd has paid a sum of total ₹8.45 cr. to related parties in the form of donations.
- FY2018: ₹2.00 cr.
- FY2017: ₹1.75 cr
- FY2016: ₹1.35 cr.
- FY2015: ₹1.50 cr.
- FY2014: ₹0.75 cr.
- FY2013: ₹1.00 cr.
- FY2012: ₹0.10 cr.
- Total over FY2012-2018 = ₹8.45 cr.
An investor would appreciate that if any company, which has taken debt from lenders and gives donations to related parties, then it may be equivalent to the company taking loans and then giving it to related parties in the form of donation. Investors may seek further details about these donations from the company to arrive at their conclusions.
6) High management remuneration and employee costs of Albert David Ltd:
When an investor analyses the employee costs of Albert David Ltd as a percentage of its sales, then she notices that in FY2018, the company paid about 30% of its net sales as salaries to employees including senior management. In FY2018, Albert David Ltd had an employee cost of ₹84.5 cr. for generating net sales of ₹287.5 cr. (84.5/287.5 = 29.4%)
This level of employee cost seems very high when an investor compares the employee cost as a percentage of net sales of Albert David Ltd with its peers. The investor notices that most of the peers have their employee costs as less than half of the level of Albert David Ltd.
For the purpose of this peer comparison, we have chosen pharmaceutical companies having FY2018 net sales similar to Albert David Ltd. The following data provides the FY2018 Net sales of all the peers:
- Albert David Ltd: ₹287.5 cr.
- Anuh Pharma Ltd: ₹238 cr.
- Lincoln Pharmaceuticals Ltd: ₹361 cr.
- Mangalam Drugs and Organics Ltd: ₹279 cr.
Looking at the above chart, an investor would notice that Albert David Ltd is spending a very high amount of money on its employees when compared to its other similar-sized peers.
When an investor analyses the remuneration paid by the company to its senior management (executive chairman, executive director, and MD&CEO) in FY2018, then she notices that the company has paid a total of ₹3.69 cr. (0.92 cr. + 1.27 cr. +1.50 cr. respectively) to the above mentioned senior management. This amount of remuneration despite being within the statutory limits put by Company’s Act, 2013, however, look very high when seen in the light of the net profit after tax (PAT) of ₹10 cr. reported by the company in FY2018.
We believe that going ahead; investors should keep a close watch on the total employee costs of the company including the remuneration paid to key management personnel.
Further advised reading: Steps to Assess Management Quality before Buying Stocks
7) Very large amount of assets given as security to lenders when compared to the amount of loans:
In the FY2018 annual report, page 122, Albert David Ltd has disclosed that it has given assets worth ₹259 cr. to lenders as security.
Further advised reading: Understanding the Annual Report of a Company
An investor would notice that at March 31, 2018, Albert David Ltd has a total debt of about ₹28 cr., which is very small when compared to the ₹259 cr. of the value of assets given as security to lenders.
Lenders usually ask for very high security from borrowers who have a very high risk of default. On the contrary, an investor would notice that at March 31, 2018, Albert David Ltd has cash & investments of about ₹94 cr., which indicates that lenders would not think that the company is going to default on its debt obligations very soon. In such a situation, it is not clear why the company has provided security of almost 10 times the loan value to the lenders.
We believe that investors may contact the company to get further clarification on this aspect to rule out whether the company has provided its assets as security to lenders for the loans taken by other companies.
Advised reading: How should investors contact Companies/Management for clarifications or additional information?
8) Frequent non-recovery of security deposits given by the company:
In the FY2018 annual report of Albert David Ltd, an investor notices that the company has been consistently losing the security deposits that it had paid to others for availing certain services etc. Over the last three years, it has lost security deposits worth about ₹40 lac.
An investor may seek clarification from the company about the reasons it is not able to recover its security deposit almost every year. Investors may seek the details of the counterparties that have confiscated/run away with the deposits. What were the services for which the deposits were provided and what are the actions that the company has taken to recover this money?
Further advised reading: How to Identify if Management is Misallocating Capital
9) Less information provided by the company in communications like annual reports:
While analysing the annual reports of Albert David Ltd, an investor finds that at many places, the information provided by the company does not answer all the queries of the shareholders. An investor may look at the following instances:
i) Sale of the brand “Actibile” to Zydus Healthcare (FY2016)
Albert David Ltd sold the brand Actibile in FY2016 for ₹55 cr. to Zydus Healthcare in March 2016. However, when an investor read the annual report for FY2016, then she notices that the director’s report, as well as the management discussion & analysis sections, are completely silent on this development.
The only mention of this sales transaction in the FY2016 annual report is in the secretarial audit report (page 26):
We further report that during the period under audit, the Company has sold its brand ‘Actibile’ to M/s. Zydus Healthcare Limited, Ahmedabad for a lump sum consideration of Rs.55 crores.
Any investor would expect that she would get the message about such important development in the director’s report or the management discussion & analysis. Otherwise, an investor may be left guessing the source of a large amount of “exceptional item” in the P&L. This is because nowhere else in the annual report, apart from the secretarial audit report, it mentions the source/details of the exceptional item.
The investors should thank the secretarial auditor for including this development in his report, which was reproduced in the annual report.
ii) Disposal of a large amount of assets in FY2018:
While analysing the annual report for FY2018, on page 103, an investor notices that Albert David Ltd has disposed of assets worth ₹35 cr. during the year.
Disposal of assets worth ₹35 cr. is a significant development for the company. However, despite reading the annual report, an investor does not get a clear answer to many of the questions like:
- What are these assets, which are disposed of?
- Whether these are assets of the Mandideep plant, which has been closed down during the year.
- If these assets are of the Mandideep plant, then whether all the assets are now valued at zero or the value of disposed assets represents the management’s estimate of the reduction of those assets from their prior value? If it is a reduction in value, then by what percentage the value has eroded for the plant and machinery of the Mandideep plant.
- What about the value of the physical infrastructure remaining at the plant: the land, the building, and the machinery? What is its value?
Therefore, despite reading the annual report, an investor does not get an answer to such critical queries related to the disclosure of disposal of assets worth ₹35 cr. in the financial statements. We believe that the provided information might be sufficient to fulfil the legal requirements. However, it does not help an investor in deriving meaningful conclusions.
Further advised reading: Steps to Assess Management Quality before Buying Stocks
10) Regulatory risk:
The pharmaceutical industry is a highly regulated industry and frequently the authorities keep on updating the policies. As a result, many times, even the established products of different companies are put under restrictions/banned. Therefore, investors in pharmaceutical companies should always be ready to face a situation when key products of their companies are restricted by the govt., which might result in a significant loss of business.
Albert David Ltd has faced such a situation in the past when in FY2011, govt. banned the use of human placenta extract based medicines. (FY2011 annual report, page 10):
The financial results for the year would have been much better but for prohibition on manufacture and sale of Company’s flagship product ‘Placentrex’ imposed by the Govt. Authorities w.e.f. 10th February, 2011 resulting in loss of sales and profit during the period from 10th February, 2011 to 31st March, 2011. Your company has filed a writ petition against this prohibition with Hon’ble High Court of New Delhi and the final verdict is awaited.
The company contested the govt’s decision in the court. The govt. lifted the ban on Placentrex partially in FY2012. However, the govt’s decision to ban the medicine had created a fear in the minds of medical practitioners while using Placentrex, which affected the sales and profits of the company. (FY2012 annual report, page 11):
As reported last year, Govt. of India pursuant to directives of Hon’ble High Court of Delhi, had revoked the ban on Placentrex Injection for PID and Placenterex topical application for wound healing with effect from 30th May, 2011. However, prohibition on some products under the “Placentrex Group” were not restored.
This act of prohibiting and revocating the earlier order by the Govt. Authorities had created some cloud of disbelief amongst the medical practitioners. Your company is gradually recovering from the setback and making all efforts to restore the confidence of doctors and revive Placentrex business.
Further advised reading: Understanding the Annual Report of a Company
We believe that Investors should keep in mind always that in the case of pharmaceutical companies, any time they may hear adverse developments from the regulatory side. It has happened with Albert David Ltd in the past. It may happen again in the future.
Margin of Safety in the market price of Albert David Ltd:
Currently (Sept 24, 2018), Albert David Ltd is available at a price to earnings (PE) ratio of about 13 based on earning of past four quarters ending June 2018. The PE ratio of 13 does not offer any margin of safety in the purchase price as described by Benjamin Graham in his book The Intelligent Investor.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- Further advised reading: 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- Read: How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Further advised reading: Hidden Risk of Investing in High P/E Stocks
Analysis Summary
Overall, Albert David Ltd seems like a company, which has been growing at a moderate pace of 4-5% year on year until FY2016 with nearly stable profit margins. However, suddenly after 2016, the company has witnessed its fortunes change for the worse. The company was hit by twin reforms of demonetization and introduction of GST. In addition, the company faced increasingly intense competition from the unorganized sector. As a result, after FY2016, the company witnessed its sales and profit margins plummet. The impact of competition is so severe that the company could not maintain the profitability of its syringe & needle manufacturing unit. Therefore, ultimately, it had to shut this unit down.
Albert David Ltd has created a good niche in some of the pharmaceutical segments. It has created a few good brands. The company could capitalize on the success of one of its brands, Actibile, when Zydus Healthcare purchased it for ₹55 cr. in FY2016. As a result, the company now has a lot of cash surplus. However, a few decision of the company for the use of cash, raise questions.
The company has been using its cash & resources for the benefit of promoter group entities. It has given loans to such related parties of promoters. It has invested in equity shares of such entities. It has taken over the risk of such promoter entities by giving guarantees for their loans and it has been giving donations to promoter entities year after year. It is advisable that investors should convince themselves about these transactions before making any final decision about the company.
Albert David Ltd has significantly high employee costs when compared to its peers. Surprisingly, the company has given assets of about 10 times the loan amount to its lenders as security. Investors may seek clarifications from the company about the reasons for such a high value of the security given to lenders as well as the reasons for very high employee costs.
The amount of information disclosed by Albert David Ltd in its annual report leaves many questions unanswered. As a result, investors may contact the company for getting further clarifications on multiple unanswered aspects like frequent non-recovery of security deposits and disposal of fixed assets etc.
Going ahead, investors should keep a close watch on the transactions of the company with related parties/promoter group entities, profit margins, usage of surplus cash, employee costs with senior management remuneration as well as the regulatory announcements.
Further advised reading: How to Monitor Stocks in your Portfolio
These are our views on Albert David Ltd. However, investors should do their own analysis before making any investment-related decision about the company.
You may use the following steps to analyse the company: “Selecting Top Stocks to Buy – A Step by Step Process of Finding Multibagger Stocks”
Hope it helps!
Regards,
Dr Vijay Malik
P.S.
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Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
