Analysis: Anuh Pharma Limited

This article provides a fundamental analysis of Anuh Pharma Ltd a bulk drug producing company focusing on antibiotics like macrolides, anti-TB products, anti-malarial as well as corticosteroids.

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.

Anuh Pharma Ltd Research Report by Reader

Q: I have invested in Anuh Pharma Ltd for a year. Reasons for selecting these stocks were:

1. The stock was available at reasonably cheap PE ratio with high ROE and ROCE ratios.
2. Zero debt company with high promoter holding,
3. Major revenue is from export market, with India being an emerging market, rupee devaluation of average 2-3% annually is certain.

Anuh Pharma Ltd has given 300%+ returns in 2014/15. At present price and valuation, what are the prospects Anuh Pharma Ltd?

Dr Vijay Malik’s Response

Thanks for writing to me!

Financial Analysis of Anuh Pharma Ltd:

Anuh Pharma Ltd has been growing its sales at a stable growth rate of about 18-20% over the last 10 years (2005-14). However, Anuh Pharma Ltd has witnessed its profitability margins fluctuate widely over the same period.

Operating profitability margins (OPM) have been varying from 7% to 17% and net profitability margins (NPM) have been varying from 5% to 9%. This is the typical feature of a commodity product company where Anuh Pharma Ltd is not able to pass on the increase in raw material costs to its customers. This is a feature of the industries where the buyer has more bargaining power than the supplier. API/bulk drug industry is one of the highly competitive industries in India.

Further advised reading: How to do Business Analysis of Pharmaceutical Companies

Moreover, both OPM and NPM have been witnessing a declining trend in recent years. An investor should be wary of these features before making any investment in Anuh Pharma Ltd.

Operating Efficiency Analysis of Anuh Pharma Ltd:

Anuh Pharma Ltd has been reflecting deteriorating operating parameters over the years. Fixed asset turnover (Asset turnover) has declined from 30.1 in FY2012 to 21.9 in FY2014. The inventory turnover ratio has declined from 15 to 12 during the same period. This is not a desirable feature in an ideal investment.

Inability to Convert Profits into Free Cash: 

Anuh Pharma Ltd is not able to convert its profits into free cash. This is evident from the comparison of cumulative profit (PAT) vs. cumulative cash flow from operations (CFO) over the last 10 years. Over 2005-14, Anuh Pharma Ltd reported a total PAT of INR 103 cr. However, during the same period, it had a CFO of only INR 54 cr.

One of the reasons for this condition is that Anuh Pharma Ltd is not able to collect money from its customers in time as its receivables days have increased from 61 days in FY2011 to 89 days in FY2014.

If a company is not able to collect cash from customers and its operating efficiency is deteriorating day by day, then in any normal business situation, the company would be relying on other sources of funds to meet its cash requirements. Most of the companies under such scenarios end up raising more and more debt or equity dilution.

However, Anuh Pharma Ltd does not seem to have done any of these. On the contrary, it has reduced its debt. This is primarily because of its very high asset turnover. Apparently, it is operating its business in a highly capital-efficient manner. This statement might seem contradictory to the prior inference that the operating efficiency of Anuh Pharma Ltd is declining year on year. However, despite the decline, the asset turnover ratio of 21.9 is high. It indicates that if Anuh Pharma Ltd invests INR 1 in its assets, then it would be able to generate additional sales of INR 21.9. This deluge of new sales and profits with minimal investment in assets masks the operating inefficiency.

Important: Such kinds of levels of asset turnover are not normally seen in businesses. An investor should analyse in-depth the reasons for such high levels of asset turnover before taking any investment decision regarding Anuh Pharma Ltd. An investor should compare its asset turnover with its peers and talk to the management to understand any special technology that they might be used to provide such results. However, for the purpose of this analysis, I would assume that the reported numbers are right.

To gauge the impact of asset turnover on any business, an investor should study the case of Amtek India Ltd, which has been reeling under high debt despite growing its sales & profits at a high growth rate and collecting the money from its customers in time. A comparison of Anuh Pharma Ltd and Amtek India Ltd would be a very interesting lesson for any investor.

High asset turnover is a feature of a good business. However, if Anuh Pharma Ltd continues on its path of declining operating efficiency, then it would lose this advantage and we might see increasing debt levels in the company.

Margin of Safety in the market price of Anuh Pharma Ltd:

Anuh Pharma Ltd is currently available at a P/E ratio of 17.

We recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, taking 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.

• 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
• How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
• Hidden Risk of Investing in High P/E Stocks

As per the financial data available, I infer that Anuh Pharma Ltd represents a company in a low capital intensive and expectedly highly competitive industry, which does not seem to have a lot of negotiating power with its customers. As a result, its profitability margins have been suffering. The company despite functioning in a low capital-intensive segment has been witnessing deteriorating operating efficiency. Anuh Pharma Ltd might miss the advantage of high asset turnover and see high debt levels if its management does not pull up its socks.

I believe that rupee depreciation if it continues, should be a positive surprise and not the core reason for investing in any company. Otherwise, an investor should invest directly in dollars.

The stock price of Anuh Pharma Ltd has run up a lot in the last 12 months. However, whether it would sustain at these levels, move higher or lower, is anybody’s guess. One thing I believe is that the market price would definitely reward the shareholders if the company improves its business/operating efficiency and keeps on growing in future with healthy profitability margins. Such rewards might materialize in months or years or decades, no one knows. However, if Anuh Pharma Ltd keeps sliding on a deteriorating operating efficiency path, then such times may never arrive.

These are my views on Anuh Pharma Ltd. Financial numbers are always open to different interpretations; therefore, any investor should conduct her own due diligence before making any investment decision related to Anuh Pharma Ltd esp. verifying the asset turnover levels.

You may use the following steps to analyse the company: “How to do detailed analysis of a company“

Hope it helps!

Regards,

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.