Analysis: Lincoln Pharmaceuticals Ltd

Modified: 04-Sep-21

The current section of the “Analysis” series covers Lincoln Pharmaceuticals Ltd, an Indian company manufacturing pharmaceutical formulations. The company sells its products primarily in India and African nations.

“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.

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.

Lincoln Pharmaceuticals Ltd Research Report by Reader

Dear Sir,

Until 2018, I used to blindly invest in companies. Later, I found your website and I have learnt a lot from it. I have seen your stock analysis excel template and prepared the sheet myself.

I have prepared my analysis for Lincoln Pharmaceuticals Ltd. Kindly go through the same and provide your valuable suggestions.

Regards

N Sreekanthreddy

Lincoln Pharmaceuticals Ltd:

When we consider the 10 years of financial data of Lincoln Pharmaceuticals Ltd, there are 2 eras. The first one is till FY2016 and the second one is after FY2016. Sales were increasing year on year (YOY) with a compounded annual growth rate (CAGR) of 17.71% that reflected on the share price, which reached the peak of almost ₹300 with a price to earnings (PE) ratio of 22. However, sales were down by 10% in FY2017 and sales are stagnant since then with a meagre 2.37% CAGR.

However, the NPM (Net Profit Margin=Net Profit/Sales) has increased from single digits to double digits. It reflected on net profit, which is increased from ₹23.68 Crores to ₹51.44 Crores.

What has changed?

Lincoln Pharmaceuticals Ltd discontinued less margin contract manufacturing.

Its focus shifted to export business, which increased from ₹111.98 crores in FY2017 to ₹217 crores in FY2020.

Research and development (R&D) expenditure has also increased simultaneously.

Especially, the financials have improved a lot like receivable days, ROCE, Debt, debt to equity (DE) ratio and cash.

A recent interview by the promoter indicates that they are planning to set up a factory for hormones using internal accruals. Therefore, the company is on the right path for the next phase of growth.

Next-generation of the family, Munjal M. Patel, Aashish R. Patel, Meha M. Patel are inducted into the board since 2014. This could be the reason for the improvement of the above 4 points.

Small companies become huge companies and gave 100x returns after induction of their next generation into the management like Eicher Motors (Siddhartha Lal).

In addition, the promoters have increased their stake by 4.9% during the 2020-21 financial year. It shows their confidence in the future. Promoters are still planning to increase the stake in future as per their recent interviews.

The margin of safety: Discounted cash flow (DCF) value is ₹294 with a conservative approach of 10% growth in free cash flow (FCF) and a 6% inflation rate. Hence, the margin of safety is available.

Despite all the improvements, PE and PC (price to cash) have reduced since FY2017. Regular trade volumes are around 50k per day in Lincoln Pharmaceuticals Ltd and it has surged further. Therefore, it indicates that prominent investors are entering the stock. Currently, Lincoln Pharmaceuticals Ltd is available at an attractive PE level of 9.64. However, as it is a microcap company, it should be monitored on regular basis.

Disclosure: Invested at ₹237 levels.

Disclaimer: I am not a SEBI registered adviser. All the information provided by me is for educational/informational purposes only. Please do your own due diligence before you make any investment decision.

Regards,

N Sreekanthreddy

Dr Vijay Malik’s Response

Dear N Sreekanthreddy,

Thanks for sharing the analysis of Lincoln Pharmaceuticals Ltd with us! We appreciate the time & effort put in by you in the analysis.

While analysing Lincoln Pharmaceuticals Ltd, an investor would notice that during the last 10-years, the company had three subsidiaries, Lincoln Parenteral Limited (98.58%), Zullinc Healthcare LLP (100%) and Savebux Enterprises Private Limited (100%). As a result, the company reported both standalone as well as consolidated financials.

We believe that while analysing any company, an investor should always look at the company as a whole and focus on financials, which represent the business picture of the entire company including its subsidiaries, joint ventures etc. Consolidated financials of any company, whenever they are present, provide such a picture.

Further advised reading: Standalone vs Consolidated Financials: A Complete Guide

Therefore, in this analysis of Lincoln Pharmaceuticals Ltd, we have studied the consolidated financial performance of the company.

With this background, let us analyse the financial performance of the company.

Lincoln Pharmaceuticals Ltd Financial Performance FY2011 FY2020

Financial and Business Analysis of Lincoln Pharmaceuticals Ltd:

While analyzing the financials of Lincoln Pharmaceuticals Ltd, an investor notices that the sales of the company have grown at a pace of about 9% year on year from ₹188 cr in FY2012 to ₹424 cr in FY2021. Further, the sales of the company have increased to ₹443 cr in the 12-months ended June 30, 2021, i.e. during July 2020-June 2021.

While analysing the revenue growth of the company over the last 10-years, an investor notices that until FY2016, sales of Lincoln Pharmaceuticals Ltd grew at a fast pace of 20% from ₹188 cr in FY2012 to ₹400 cr in FY2016. However, in FY2017, the company witnessed a sharp decline in its sales as the sales declined by 10% to ₹360 cr in FY2017. Thereafter, the sales of the company have grown at a slow pace of about 4% from ₹360 cr in FY2017 to ₹424 cr in FY2021.

While looking at the profitability of the company, an investor notices that the operating profit margin (OPM) of the company improved from 7% in FY2012 to 20% in the 12-months ended June 2021. The OPM of the company had witnessed a near consistent increase over the last 10-years.

To understand the reasons for the decline in the revenue of the company in FY2017 as well as to understand the reasons for the improvement in its OPM, an investor needs to read the publicly available documents like annual reports, credit rating reports as well as its corporate announcements.

After going through the above-mentioned documents, an investor notices the following key factors, which influence the business of Lincoln Pharmaceuticals Ltd. An investor needs to keep these factors in her mind while she makes any predictions about the performance of the company.

1) Domestic (India) pharmaceuticals market has very high competition. Many players offer similar products. Low pricing power:

While analysing the business performance of Lincoln Pharmaceuticals Ltd, an investor notices that the pharmaceutical market in India has the presence of many players, which include domestic as well as multinational companies. The domestic formulations segment is very crowded and as a result, the companies do not have pricing power.

The credit rating agency, ICRA highlighted this aspect of the business of Lincoln Pharmaceuticals Ltd in its report for the company in February 2018.

The domestic generic formulation industry faces stiff competition with the presence of numerous contract manufacturers, MNCs as well as established domestic brands with some of these players also having a pan-India presence leading to intense competition, which restricts the company’s pricing flexibility.

An investor would appreciate that when any sector has high competition, and the customers have a choice of buying goods from many suppliers, then the bargaining/pricing power shifts from the suppliers to the customers. In such a situation, the suppliers become price takers.

Such a situation of low pricing power of suppliers becomes more prominent when the goods produced by the suppliers are commodity in nature and indistinguishable from each other. This is because, if the goods produced by all the suppliers are similar, then the customers can easily switch from one supplier to another without worrying about any impact on their final products.

In such a situation, none of the suppliers can afford to increase prices. As a result, whenever the raw material costs go up, the suppliers have to take a hit on their profit margins.

Lincoln Pharmaceuticals Ltd intimated to its investors about the situation of its business segment involving many suppliers competing for the same customers with similar kinds of undifferentiated products in its FY2010 annual report on page 8.

The Company is functioning in the competitive markets where there are number of small scale and medium scale manufacturers are in the presence. There are number of similar kind of products present in the markets and therefore there is a pressure on the margin on the Company.

Therefore, an investor would appreciate that due to the intense competition and low pricing power in the domestic market, Lincoln Pharmaceuticals Ltd started to shift its focus from the Indian market to exports.

Let us see how the business of Lincoln Pharmaceuticals Ltd evolved once it started prioritizing the exports market over the domestic market.

2) Increased focus on exports by Lincoln Pharmaceuticals Ltd:

When an investor analyses the breakup of sales of Lincoln Pharmaceuticals Ltd between domestic and export sales over the last 10-years, then she notices that the share of exports has increased from 21% in FY2012 to 53% in FY2021.

The following table shows the breakup of the consolidated revenue of Lincoln Pharmaceuticals Ltd into exports and domestic sales.

Lincoln Pharmaceuticals Ltd Exports Vs Domestic Sales Analysis

From the above table, an investor would notice that as the share of exports increased over the last 10-years, the operating profit margin (OPM) of the company also increased from 7% in FY2012 to 21% in FY2021.

An investor would also notice that from FY2017 onwards, when the share of exports started increasing at a fast pace i.e. from 33% of sales in FY2017 to 53% in FY2021, the operating profit margins (OPM) of the company also increased significantly. The OPM of the company increased from 13% in FY2017 to 21% in FY2021.

In FY2014, the company has disclosed to the shareholders that it plans to increase its focus on the African countries and it is expecting that most of its growth would come from these nations.

FY2014 annual report, page 16:

In Export, we are steadily growing and also in coming year, we are planning to enter in most of the West African Countries, where we are targeting potential growth in the company.

The credit rating agency, ICRA has also highlighted the change in the strategy of Lincoln Pharmaceuticals Ltd from a focus on the domestic market to prioritizing export markets in its report for the company in February 2021.

The Group was predominately a domestic market player; however, it has been increasing its focus on exports to semi-regulated markets in the past few fiscals owing to intense competition in the domestic generic formulations industry.

From the above table, an investor would notice that the domestic sales of Lincoln Pharmaceuticals Ltd are on a decline in recent years.

Lincoln Pharmaceuticals Ltd had reported a revenue of ₹283 cr from the domestic market in FY2016, which declined to ₹168 cr in FY2020. In FY2021, the sales from the domestic market have increased to ₹198 cr; however, it is still significantly lower than the peak domestic sales achieved by the company in FY2016.

Advised reading: How to do Business Analysis of a Company

3) Stopping of trading and domestic generics business by Lincoln Pharmaceuticals Ltd:

While listening to the audio recording of the annual general meeting (AGM) of the company for FY2020 (transcript) the managing director (MD) of the company, Mr Mahendra G. Patel, mentioned that the company has stopped the trading business and the generics business in the domestic market.

The stopping of trading business seems to be one of the biggest reasons for a decline in the sales of the company in FY2017 when the sales had declined by 10% from ₹400 cr in FY2016 to ₹360 cr in FY 2017.

4) Focus on the value-adding products by Lincoln Pharmaceuticals Ltd:

While analysing the development of the business of Lincoln Pharmaceuticals Ltd over the years, an investor notices that the company has launched a few innovative products including NDDS (novel drug delivery systems.

The below chart from the Q3-FY2021 result presentation of Lincoln Pharmaceuticals Ltd in February 2021, page 11 highlights some of the important launches done by the company in recent years.

Lincoln Pharmaceuticals Ltd New Innovative Product Launches

An investor would notice that the company developed and launched two NDDS products in FY2015. It launched further three new products (apparently the first time launch of these products in India) in FY2017. It launched next-generation progesterone therapy, Prolin spray, in FY2018.

All these launches are value-added products, which have helped the company improve its profit margins.

Therefore, from the above discussion, an investor would notice that over the last 10-years, Lincoln Pharmaceuticals Ltd has taken some strategic steps like shifting its focus away from the highly competitive domestic market to the exports markets. The company stopped the low margin trading business and the generics business. In addition, the company focused on value-added products.

All these steps have helped the company in improving its profit margins over the years. An investor may notice that the operating profit margin (OPM) of the company has improved significantly from 7% in FY 2012 to 20% in the 12-months ended June 30, 2021, i.e. during July 2020-June 2021.

The credit rating agency, ICRA, highlighted the role of these decisions in the improvement of profit margins of Lincoln Pharmaceuticals Ltd in its report for the company in February 2021.

The improvement was aided by successful product launches, increased contribution of higher value-added exports as well as manufacturing sales vs. trading sales to its revenue profile.

Advised reading: Credit Rating Reports: A Complete Guide for Stock Investors

Lincoln Pharmaceuticals Ltd is continuing to focus on the exports market. In May 2020, the company received the EU GMP approval, which allows it to sell its products in all of the European Union (EU) member countries as well as European Economic Area (EEA) markets.

Corporate announcement to BSE on May 19, 2020:

The certification will allow the company to market its products in all the 27 member countries of EU and also give access to European Economic Area (EEA) countries. Company looks to enter the EU markets very soon with its dermatology, gastro and pain management products and gradually expand product portfolio.

As per the company, it plans to start exports to EU nations by the end of FY2022.

Q1-FY2022 result, page 8:

Exports to EU markets are likely to commence from Q4FY22.

However, an investor should keep in her mind that in the pharmaceuticals sector, any company or its investors should not get relaxed only by getting the initial approvals and start of sales in any geography. This is because meeting regulatory guidelines and staying compliant with the required regulations and quality standards is an ongoing process. Any lapses on this front may prove very costly for any company.

This is called regulatory risk and the pharmaceutical companies are very concerned about it. Let us see an incidence where Lincoln Pharmaceuticals Ltd faced regulatory risk.

5) Regulatory risk:

In FY2016, Lincoln Pharmaceuticals Ltd faced a situation where the regulatory risk created significant issues for it.

In January 2016, the drug authority of Tanzania (TFDA) banned the import of Chloramphenicol Sodium Succinate, which is one of the best-selling products of the company. TFDA cancelled the license of Lincoln Pharmaceuticals Ltd and ordered to destroy the Chloramphenicol already supplied by the company to customers in Tanzania.

Credit rating report by CRISIL in February 2016:

scale of operations and profitability of Lincoln group are likely to impacted over the near to medium term on account of one of the highest selling product (chloramphenicol sodium succinate) ban in Tanzania as of January 2016. The group had got many orders from government institutes based out of Tanzania; however Tanzania Drug authority (TFDA) has announced to ban the product’s import while cancelling the group’s license. In such circumstances, the inventory dispatched is kept on hold and the authority has issued notice to destroy the product. The group’s estimates significant impact on its profitability due to the product ban and rejection of the current batch by TFDA.

The company highlighted that this ban would have a significant impact on its profitability.

An investor would appreciate that in the pharmaceutical industry, non-compliance with the required regulations may shut the business completely if the company is not able to provide a satisfactory resolution to the concerns raised by the drug regulators.

Therefore, an investor should always keep a track of the developments related to the approvals of the company with various drug regulators of its target countries.

Going ahead, an investor should monitor the trend of domestic and export sales in the overall revenue of the company. In addition, she should focus on the profit margins of the company and in case, she notices a decline in the profit margins, then she should explore the reasons for the same. This is because; loss of pricing power due to increasing competition in its target markets might be one of the reasons for declining profit margins.

While analysing the tax payout ratio of Lincoln Pharmaceuticals Ltd., an investor notices that for most of the years, the tax payout ratio of the company has been lower than the standard corporate tax rate prevalent in India.

While going through the annual reports of the company, an investor notices that the key reasons for a lower tax payout ratio for Lincoln Pharmaceuticals Ltd are (i) tax benefits on scientific research and (ii) credits available to the company under minimum alternate tax (MAT) regime.

FY2019 annual report, page 140:

Lincoln Pharmaceuticals Ltd Income Tax Reconciliation FY2018 FY2019

The above table from the FY2019 annual report shows the income tax reconciliation between the standard corporate tax rate applicable in India and the tax payout in the profit & loss (P&L) statement of Lincoln Pharmaceuticals Ltd. An investor may notice that the tax benefits on scientific research and MAT credits are the biggest factors leading to a lower tax payout ratio for Lincoln Pharmaceuticals Ltd in both FY2019 as well as FY2018.

Going ahead, an investor may keep a close watch on the tax payout ratio of the company and understand more about the tax incentives available to the company.

Further advised reading: How to do Financial Analysis of a Company

Operating Efficiency Analysis of Lincoln Pharmaceuticals Ltd:

a) Net fixed asset turnover (NFAT) of Lincoln Pharmaceuticals Ltd:

When an investor analyses the net fixed asset turnover (NFAT) of Lincoln Pharmaceuticals Ltd in the past years (FY2013-21), then she notices that the NFAT of the company has been consistent in the range of 3.0 to 4.0 over the years.

The NFAT had increased to 4.9 in FY2016; however, it declined in subsequent years. This decline seems to be a result of two factors.

First, Lincoln Pharmaceuticals Ltd did a capital expenditure of ₹38 cr in FY2016 where it increased the manufacturing capacity.

Q3-FY2016 results presentation, March 2016, page 7:

Completed the expansion of Unit 1 (Tablet, Capsule & Ointment), which resulted in trebling of the current capacity

An investor would appreciate that whenever a company increases its manufacturing capacity, then it may take a couple of years for the company to gain new orders to reach the optimal utilization levels of the new plant. Therefore, after a company completes capacity expansion, the NFAT of the company stays low for a few years.

Second, after FY2016, the sales of the company witnessed a decline due to the stoppage of trading and domestic generic business by Lincoln Pharmaceuticals Ltd. Because of the lower sales, the NFAT of the company stayed low in the subsequent years.

An investor would notice that now the company has received EU GMP approval and it plans to start sales to the EU region by Q4-FY2022. Therefore, going ahead, the NFAT of the company might witness an increase.

An investor should monitor the NFAT of the company to ascertain whether it is able to utilize its assets efficiently or not.

Further advised reading: Asset Turnover Ratio: A Complete Guide for Investors

b) Inventory turnover ratio of Lincoln Pharmaceuticals Ltd:

While analysing the efficiency of inventory utilization by Lincoln Pharmaceuticals Ltd, an investor notices that over the last 10 years, the consolidated inventory turnover ratio (ITR) of the company has stayed in the range of 9.0-10.0.

The ITR of the company had increased to 16.2 in FY2016; however, since then it has moderated sharply to 9.0 in FY2021.

An investor would notice that from FY2016 onwards the company has significantly increased its export sales. In FY2016, the share of exports in the sales of Lincoln Pharmaceuticals Ltd used to be 29%, which has increased to 53% in FY2021.

While analysing the business of Lincoln Pharmaceuticals Ltd, an investor notices that the export sales typically make the suppliers keep a higher inventory of goods in addition to providing a higher credit period to the overseas customers. As a result, the export sales are usually working capital intensive.

The credit rating agency, ICRA, highlighted the working capital intensive nature of export sales in its report of Lincoln Pharmaceuticals Ltd in February 2021.

High working capital intensity of operations – The working capital intensity of the Group is high and has witnessed an increase with surge in sales to the export market, which has higher credit period (up to ~120 days compared to ~60-90 days in the domestic market), coupled with moderate inventory requirement.

Therefore, an investor would appreciate that due to a sharp increase in the exports from FY2016 onwards, the inventory turnover ratio (ITR) of Lincoln Pharmaceuticals Ltd declined from 16.2 in FY2016 to 9.0 in FY2021.

Going ahead, an investor may keep track of the inventory level of the company to understand whether the company is able to maintain its inventory utilization efficiency or not.

Further advised reading: Inventory Turnover Ratio: A Complete Guide

c) Analysis of receivables days of Lincoln Pharmaceuticals Ltd:

Over the last 10 years, the receivables days of Lincoln Pharmaceuticals Ltd have improved from 131 days in FY2013 to 91 days in FY2021. A reduction in the receivables days over the years indicates that Lincoln Pharmaceuticals Ltd has been able to improve the collection of its dues from its customers.

Nevertheless, an investor would notice that the receivables days of Lincoln Pharmaceuticals Ltd have consistently been more than 90 days. It indicates that the company has to give a comparatively longer period to its customers than the usual credit period of 45-60 days that we notice in general across various industries.

The credit rating agency, ICRA, highlighted the requirement of Lincoln Pharmaceuticals Ltd to provide a longer credit period to its overseas customers in its report for the company in December 2019.

The ratings also consider the high working capital intensity of the Group owing to the long credit period extended to its customers especially in the export markets.

An investor would appreciate that whenever a company has to give a longer credit period to its suppliers, then it faces a higher default risk. It means that if a company provides a higher credit period to its customers, then there is a higher probability that the customers may not be able to pay or refuse to pay when the payment is due.

Moreover, when an investor notices that the export market of Lincoln Pharmaceuticals Ltd is concentrated in Africa and other developing nations, then she would appreciate that the company faces higher credit risk.

While reading the February 2021 credit rating report of the company prepared by ICRA, an investor notices that almost 45-55% of export sales of Lincoln Pharmaceuticals Ltd are to the Africa region.

The export sales are concentrated, with African regions contributing ~45-55% to the total export sales,

While analysing the annual reports of Lincoln Pharmaceuticals Ltd, an investor notices that at times, the company has faced a significant delay in collecting its money and due to delays. The following data from the FY2019 annual report indicates that Lincoln Pharmaceuticals Ltd had ₹38.5 cr and ₹33.5 cr of receivables classified as credit-impaired in FY2018 and FY2019 respectively, which is about 30-40% of the overall trade receivables for these years.

Lincoln Pharmaceuticals Ltd Credit Impaired Trade Receivables

In light of the same, when an investor analyses the losses recognized by Lincoln Pharmaceuticals Ltd in its P&L over the years, then she notices that during FY2012-2020, the company has lost almost ₹10 cr in bad debt i.e. cases where customers refused to pay the company for the goods supplied by it.

Lincoln Pharmaceuticals Ltd Provisions For Bad Debt

Even if the company has been able to improve its receivables days over recent years (FY2019-2021); however, going ahead, an investor should closely monitor the trend of receivables days. This is because an increase in the receivables days may be a sign if the company faces any challenges in recovering its dues from its customers.

Further advised reading: Receivable Days: A Complete Guide

Nevertheless, when an investor notices that Lincoln Pharmaceuticals Ltd has improved its receivables days over the last 10-years and has maintained its inventory turnover ratio, then she can understand that the company kept its working capital position under control.

When an investor compares the cumulative net profit after tax (cPAT) and cumulative cash flow from operations (cCFO) of Lincoln Pharmaceuticals Ltd for FY2012-21 then she notices that the company has converted all of its profits into cash flow from operating activities.

Over FY2012-21, Lincoln Pharmaceuticals Ltd reported a total cumulative net profit after tax (cPAT) of ₹289 cr. During the same period, it reported cumulative cash flow from operations (cCFO) of ₹319 cr.

It is advised that investors should read the article on CFO calculation, which would help them understand the situations in which companies tend to have the CFO lower than their PAT. In addition, the investors would also understand the situations when the companies would have their CFO higher than the PAT.

Further advised reading: Understanding Cash Flow from Operations (CFO)

Learning from the article on CFO will indicate to an investor that the cCFO of Lincoln Pharmaceuticals Ltd is higher than the cPAT due to the following factors:

  • Depreciation expense of ₹51 cr (a non-cash expense) over FY2012-FY2021, which is deducted while calculating PAT but is added back while calculating CFO.
  • Interest expense of ₹60 cr (a non-operating expense) over FY2012-FY2021, which is deducted while calculating PAT but is added back while calculating CFO.

The Margin of Safety in the Business of Lincoln Pharmaceuticals Ltd:

a) Self-Sustainable Growth Rate (SSGR):

Read: Self Sustainable Growth Rate: a measure of Inherent Growth Potential of a Company

Upon reading the SSGR article, an investor would appreciate that if a company is growing at a rate equal to or less than the SSGR and it can convert its profits into cash flow from operations, then it would be able to fund its growth from its internal resources without the need of external sources of funds.

Conversely, if any company attempts to grow its sales at a rate higher than its SSGR, then its internal resources would not be sufficient to fund its growth aspirations. As a result, the company would have to rely on additional sources of funds like debt or equity dilution to meet the cash requirements to generate its target growth.

An investor may calculate the SSGR using the following formula:

SSGR = NFAT * NPM * (1-DPR) – Dep

Where,

  • SSGR = Self Sustainable Growth Rate in %
  • Dep = Depreciation rate as a % of net fixed assets
  • NFAT = Net fixed asset turnover (Sales/average net fixed assets over the year)
  • NPM = Net profit margin as % of sales
  • DPR = Dividend paid as % of net profit after tax

(For systematic algebraic calculation of SSGR formula: Click Here)

While analysing the SSGR of Lincoln Pharmaceuticals Ltd, an investor would notice that over the years, the company had an SSGR in the range of 25%-35%. At the same time, she would notice that Lincoln Pharmaceuticals Ltd has grown at a CAGR of about 9% in the last 10-years from ₹188 cr in FY2012 to ₹424 cr in FY2021.

Lincoln Pharmaceuticals Ltd has grown at a pace, which is lower than what its internal resources can afford; therefore, over the years, the company has been able to generate surplus cash and repay its debt.

An investor would notice that over the last 10-years, Lincoln Pharmaceuticals Ltd has repaid its entire debt of ₹65 cr outstanding in FY2012 and has become a debt-free company in FY2021. Moreover, in FY2021, the company has a cash & investments balance of ₹95 cr.

An investor arrives at the same conclusion when she analyses the free cash flow (FCF) position of Lincoln Pharmaceuticals Ltd.

b) Free Cash Flow (FCF) Analysis of Lincoln Pharmaceuticals Ltd:

While looking at the cash flow performance of Lincoln Pharmaceuticals Ltd, an investor notices that during FY2012-2021, it generated cash flow from operations of ₹319 cr. During the same period, it did a capital expenditure of about ₹119 cr.

Therefore, during this period (FY2012-2021), Lincoln Pharmaceuticals Ltd had a free cash flow (FCF) of ₹200 cr (=319 – 119).

In addition, during this period, the company had a non-operating income of ₹55 cr and an interest expense of ₹60 cr. As a result, the company had a total free cash flow of ₹195 cr (= 200 + 55 – 60). Please note that the capitalized interest is already factored in as a part of the capex deducted earlier.

While looking at the overall cash-flow position of Lincoln Pharmaceuticals Ltd over the last 10 years (FY2012-2021), an investor notices that the company has primarily used its free cash flow in the following manner:

  • Reduction of debt: ₹65 cr as a reduction in total debt as it has entirely paid off the debt of ₹65 cr outstanding in FY2012 and has become debt-free in FY2021.
  • Payment of dividends to the shareholders: ₹21 cr excluding dividend distribution tax (DDT). The company might have paid about ₹4 cr (about 20% of the dividend amount) as DDT.
  • Cash & investments: ₹78 cr as the cash & investments of the company have increased from ₹17 cr in FY2012 to ₹95 cr in FY2021 (95 – 17 = 78)

Going ahead, an investor should keep a close watch on the free cash flow generation by Lincoln Pharmaceuticals Ltd to understand whether the company continues to generate surplus cash from its operations.

Further advised reading: Free Cash Flow: A Complete Guide to Understanding FCF

Self-Sustainable Growth Rate (SSGR) and free cash flow (FCF) are 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 Lincoln Pharmaceuticals Ltd:

On analysing Lincoln Pharmaceuticals Ltd and after reading annual reports, DRHP, its credit rating reports and other public documents, an investor comes across certain other aspects of the company, which are important for any investor to know while making an investment decision.

1) Management Succession of Lincoln Pharmaceuticals Ltd:

Lincoln Pharmaceuticals Ltd is promoted by the Patel family. Currently, four members of the Patel family are executive directors on the board of the company.

  • Mr Mahendra G Patel, age 67 years, is currently, the managing director of the company
  • Mr Hashmukh I. Patel, age 62 years, is currently, the whole-time director of the company
  • Mr Munjal M. Patel, age 39 years, son of Mr Mahendra G Patel, is the whole-time director of the company
  • Mr Ashish R. Patel, age 40 years, son of Mr Rajnikant G. Patel, is the whole-time director of the company.

FY2015 annual report, page 4:

Shri Munjal M. Patel is son of Shri Mahendra G. Patel, MD and Shri Aashish R. Patel is son of Shri Rajnikant G. Patel, Jt. MD of the Company.

The presence of younger family members at executive positions within the group, while the senior members are still handling responsibilities, looks like a good succession plan. This is because the young members can learn about the fine nuances of the business under the guidance of senior members until the seniors decide to take retirement.

Further advised reading: How to do Management Analysis of Companies?

2) Loans and advances given by Lincoln Pharmaceuticals Ltd to outside parties:

While analysing the annual reports of the company, an investor notices that the company has regularly given out money to others as loans and advances.

As per the FY2020 annual report of the company, it has given out about ₹30.7 cr as loans to others. The money has been given in the form of current loans, non-current loans and inter-corporate deposits.

  • Current loans: Loans and Advances to Others: ₹15.9 cr (page 143)
  • Non-Current Other Financial Assets: Loans to others: ₹12.3 cr (page 141)
  • Non-Current Other Financial Assets: Inter-Corporate Loans: ₹2.5 cr (page 141)

As per the Q4-FY2021 results, page 12, on March 31, 2021, the loans given by Lincoln Pharmaceuticals Ltd to others had increased to about ₹44 cr.

  • Non-Current Assets: Financial Assets: Loans: ₹25.09 cr
  • Current Assets: Financial Assets: Loans: ₹18.78 cr

While analysing previous annual reports, the investor notices that such loans are present in almost every annual report of the company. It indicates that Lincoln Pharmaceuticals Ltd has given out money to others regularly.

An investor may contact the company directly to understand more about the entities that have received this money from Lincoln Pharmaceuticals Ltd. She may attempt to understand whether these entities are individuals or companies who might be related to/friends/acquaintances of the promoters but are not classified under related parties as per the legal definition.

She may attempt to understand what is the benefit that shareholders of the company are getting from these loans.

Analysing these loans and understanding the reasons for them is important because such loans may represent a shift of money out of the company indicating that someone else is enjoying the economic benefits of the business of Lincoln Pharmaceuticals Ltd.

Further advised reading: How to Identify if Management is Misallocating Capital

3) Multiple instances of equity dilution by Lincoln Pharmaceuticals Ltd:

When an investor analyses the history of changes in the equity capital of the company, then she notices that Lincoln Pharmaceuticals Ltd has diluted its equity multiple times in the past. Lincoln Pharmaceuticals Ltd has raised money by way of both preferential issuances of shares as well as warrants to the promoters.

3.1) Share issuances by Lincoln Pharmaceuticals Ltd:

i) In FY2005, the company issued 104,980 shares at ₹2 per share and raised about ₹85 lac rupees.

FY2005 annual report, page 18:

Lincoln Pharmaceuticals Ltd Equity Raising FY2005

In the above section from the FY2005 annual report, an investor would notice that the share capital has increased from ₹58,958,200 in FY2004 to ₹60,008,000 in FY2005 indicating that a total of the new share capital of ₹1,049,800 (=60,008,000 – 58,958,200) is issued in FY2005. The share capital consists of shares of face value (FV) of ₹10/-. Therefore, the company seems to have issued 104,980 shares (=1,049,800/10) of FV ₹10/- in FY2005.

An investor would also notice in the above section that in FY2005, a share premium of ₹7,474,200 has been added, which seems to pertain to the issuance of new shares.

By combining the increase in share capital and the increase in share premium, an investor gets to know the total money raised by the company in FY2005, which is ₹8,524,000.

From the above data, an investor can now calculate the per-share price at which Lincoln Pharmaceuticals Ltd had issued the new shares. It comes to ₹81.2 per share (=8,524,000/104,980).

ii) In FY2006, Lincoln Pharmaceuticals Ltd again raised capital of ₹5.5 cr by issuing shares. The company issued 1,610,000 shares at a price of ₹34.5 per share consisting of a face value (FV) of ₹10 + premium of ₹24.5) (1,610,000 * 34.5 = 55,545,000)

FY2006 annual report, page 2:

ALLOTMENT OF SHARES: During the year, your Company has allotted 16,10,000 Equity Shares of Rs. 10/- each for cash at a premium of Rs.24.50 /- per share on preferential basis to various parties.

iii) In FY2010, Lincoln Pharmaceuticals Ltd raised about ₹6.48 cr by issuing 2,400,000 shares at a price of ₹27/- per share (2,400,000 * 27 = 64,800,000).

FY2010 annual report, page 43:

Company has allotted 24,00,000 equity share of face value of Rs.10/- each for cash at a premium of Rs.17/- each by way of preferential allotment during the year

iv) In FY2011, Lincoln Pharmaceuticals Ltd raised about ₹5 cr by issuing 5,000,000 shares at a price of ₹41/- per share (5,000,000 * 41 = 205,000,000)

FY2011 annual report, page 3:

During the year under review, the company has allotted 5,000,000 Equity shares of Rs. 10/- for cash at premium of Rs. 31/- per share by way of preferential allotment.

Therefore, an investor would notice that Lincoln Pharmaceuticals Ltd raised a total of about ₹33.38 cr (=0.85 + 5.55 + 6.48 + 20.5) by way of preferential issue of shares during FY2005-FY2011.

Apart from preferential issuance of shares, Lincoln Pharmaceuticals Ltd also raised money by way of preferential issue of warrants to the promoters.

3.2) Warrants allotment by Lincoln Pharmaceuticals Ltd:

The company issued warrants for the first time to the promoters on a preferential basis in FY2009, a part of which were exercised by the warrant-holders in FY2010.

In FY2009, the company issued 10,000,000 warrants with rights to subscribe equity shares of FV ₹2/- at ₹10/- per share.  The company received the subscription amount of ₹1/- per warrant i.e. 10% of the exercise amount in FY2009.

FY2009 annual report, page 21:

Company has issued 10,000,000 preferential warrants on 21 -07-2008 with a right to subscribe equity shares @ Rs. 10/- per share of equity shares of face value of Rs. 2/- each and company has received Re. 1 per each warrant. Subsequently Company has consolidated 5 equity shares of Rs. 2/- each fully paid up in to one equity share of Rs. 10/- each. In view of the same, the right to subscribe the equity shares would get consolidated at the time of exercise of right to convert warrant in to equity share.

An investor would notice that in FY2009, the company consolidated five shares of FV ₹2/- into one share of FV ₹10/- i.e. reverse share-split. As a result, in the terms of FV ₹10/-, the total number of shares that the warrant holders would receive got reduced to 2,000,000 (=10,000,000 / 5) and the exercise price increased to ₹50 (=10 * 5).

In FY2010, out of a total of 10,000,000 warrants, the promoters exercised 6,500,000 warrants by paying the balance amount and received 1,300,000 shares. The promoters did not exercise the balance of 3,500,000 warrants.

Out of the same, warrant holders holding 65,00,000 warrants exercised the rights by paying balance amount @ Rs. 9/- per share ( Face value of Rs. 2/- per share ) and against the same, the Company allotted 13,00,000 Equity shares or Rs. 10/- each at a premium of Rs. 40/- per shares to them. The Company forfeited the amount paid on balance 35,00,000 warrants which remained unexercised.

In the above instance, an investor would notice that the promoters did not exercise 3,500,000 warrants and decided to let go of ₹0.35 cr paid by them as subscription money (₹1/- per warrant) to the company. Therefore, if an investor wishes to calculate the total amount of money received by the company from this episode, then it comes to ₹6.85 cr (=6,500,000*10 + 3,500,000*1).

In FY2016, Lincoln Pharmaceuticals Ltd issued another set of warrants to the promoters. The company issued 3,689,200 warrants to be exercised at a price of ₹82/- per share.

FY2016 annual report, page 15:

The Company has Issued and Allotted 36,89,200 Convertible Warrants, Convertible into Equity Shares, at an exercise price of 82/- per equity share of the face value of ₹ 10/- each, which includes premium of ₹ 72/- per equity share.

In the next year, in FY2017, the promoters exercised all the warrants and paid the amount due in full to receive the shares.

FY2017 annual report, page 23:

The Company has Issued and Allotted 36,89,200 Equity Shares (Pursuant to conversion of warrants), at an aggregate price of Rs. 82/-per equity share of the face value of Rs. 10/- each, which includes premium of Rs. 72/- per equity share.

Therefore, in FY2016-FY2017, the company received a total of ₹30.25 cr by issuing 3,689,200 shares at ₹82/- per share (3,689,200 * 82 = 302,514,400).

As a result, Lincoln Pharmaceuticals Ltd raised a total of ₹37.1 cr (=6.85+30.25) by two warrant issues of FY2009 and FY2016.

When an investor combines the money raised by Lincoln Pharmaceuticals Ltd by way of preferential issue of shares as well as warrants from FY2005 onwards, then she notices that the company raised a total of ₹70.5 cr (=33.38 + 37.1) by equity dilution over FY2005-FY2017.

  • ₹33.38 cr by way of preferential issue of shares during FY2005-FY2011
  • ₹37.1 cr by way of preferential issue of warrants and their exercise in FY2009 and FY2016-FY2017.

From the above discussion on self-sustainable growth rate (SSGR) and free cash flow (FCF), an investor would remember that the business model of Lincoln Pharmaceuticals Ltd generates sufficient cash flows to sustain its growth rate of 9% over FY2012-FY2021. It is also evident from the fact that the company has repaid its entire debt and has become debt-free in FY2021.

In such a situation, it comes as a surprise to the investor that the company had to resort to equity dilution to raise money at frequent intervals during FY2005-FY2017.

Further advised reading: Stock Warrants to Promoters: How to Analyse

4) Giving out money raised from equity issuances as inter-corporate deposits:

When an investor analyses the usage of funds by Lincoln Pharmaceuticals Ltd over the years, then she notices that the company has frequently used its cash flows for purposes other than investments in the business of the company.

From the earlier discussion, an investor would recollect that Lincoln Pharmaceuticals Ltd has regularly given out money to third parties in the form of loans. She would remember that on March 31, 2021, Lincoln Pharmaceuticals Ltd has given out loans of about ₹44 cr to others.

In the past also, the company has been regularly giving out large amounts of money to others in the form of loans.

i) In FY2006: An investor would remember that in FY2006, Lincoln Pharmaceuticals Ltd raised ₹5.5 cr by way of preferential issuance of shares. When an investor attempt to read the annual report to find out the usage of these funds by the company, then she realizes that it had given out almost entire money (₹5.15 cr) as an inter-corporate deposit (ICD) to others (=56,000,000 in FY2006 – 2,500,000 in FY2005).

FY2006 annual report, page 18:

Lincoln Pharmaceuticals Ltd Intercorporate Deposits FY2006

Therefore, whatever money Lincoln Pharmaceuticals Ltd raised by way of issuance of shares in FY2006, it gave out to others by way of ICDs. In a sense, it is similar to using Lincoln Pharmaceuticals Ltd as a channel to move money from the accounts of subscribers of preferential issuance of shares to the accounts of entities taking ICDs from the company. Nevertheless, an investor should do her own due diligence in this regard.

ii) In FY2010: An investor would remember that in FY2010, Lincoln Pharmaceuticals Ltd raised ₹6.48 cr by way of preferential issuance of shares. When an investor attempt to read the annual report to find out the usage of these funds by the company, then she realizes in FY2010, Lincoln Pharmaceuticals Ltd had given out ICDs of about ₹7.8 cr as the ICDs increased from ₹1.2 cr in FY2009 to ₹9 cr in FY2010.

FY2010 annual report, page 31:

Lincoln Pharmaceuticals Ltd Intercorporate Deposits FY2010

An investor would also remember that during FY2010, Lincoln Pharmaceuticals Ltd had also received money when the promoters exercised a part of warrants allotted to them by the company. In FY2010, the promoters had exercised 6,500,000 warrants out of 10,000,000 warrants allotted to them in FY2009.

Therefore, an investor would notice that in FY2010, Lincoln Pharmaceuticals Ltd gave out all the money raised by way of issuance of shares and a part of the money received from the exercise of warrants to others by way of ICDs.

iii) In FY2011: From the above discussion, an investor would also remember that in FY2011, Lincoln Pharmaceuticals Ltd raised ₹20.5 cr by way of preferential issuance of shares. When an investor attempt to read the annual report to find out the usage of these funds by the company, then she realizes that it had given out the majority of the money (₹16.7 cr) as an inter-corporate deposit (ICD) to others (=25.78 cr in FY2011 – 9.07 cr in FY2010).

FY2011 annual report, page 41:

Lincoln Pharmaceuticals Ltd Intercorporate Deposits FY2011

Therefore, in FY2011 as well, whatever money Lincoln Pharmaceuticals Ltd raised by way of issuance of shares, it gave out to others by way of ICDs. An investor would appreciate that this case is also similar to using Lincoln Pharmaceuticals Ltd as a channel to move ₹16.7 cr from the accounts of subscribers of preferential issuance of shares to the accounts of entities taking ICDs from the company. However, an investor should do her own due diligence in this regard.

In FY2011, an investor also notices that there was a significant increase in the audit fees. The audit fees in FY2011 became 3.7 times to ₹615,000 in FY2011 from ₹165,000 in FY2010, an increase of 272%.

FY2011 annual report, page 48:

Lincoln Pharmaceuticals Ltd Audit Fees FY2011

While looking at the increase in the size of the business of Lincoln Pharmaceuticals Ltd over FY2011, an investor notices that the consolidated sales of the company had increased from ₹131.6 cr in FY2010 to ₹187.1 cr in FY2011, an increase of 42%. When an investor looks at the profits, then she notices that the profit after tax (PAT) of the company declined to ₹5.8 cr in FY2011 from ₹6.1 cr in FY2010.

An investor may contact the company directly to understand the reasons why the company decided to give away the money it had raised by way of diluting its equity, both in FY2006 as well as FY2011. She may ask for details of these counterparties. She may also ask about the reasons for a significant increase in the auditors’ fees when the size of the business, which might be a proxy for the scope of the audit work, has not changed so significantly.

An investor may do her own due diligence and arrive at her own conclusion about these transactions.

Further advised reading: How to Identify if Management is Misallocating Capital

5) Related party transactions of Lincoln Pharmaceuticals Ltd:

While analysing the annual reports of the company, an investor notices that Lincoln Pharmaceuticals Ltd year after year, the company is involved in numerous transactions with many persons and entities related to promoters.

An investor would appreciate that each of the transactions between the listed company and the promoters/their relatives/entities carries the potential of shifting the economic benefit from the public/minority shareholders to the promoters.

Let us see examples of some of such transactions.

5.1) Salaries and commissions paid to family members/HUFs of promoters by Lincoln Pharmaceuticals Ltd:

While analysing the annual reports of Lincoln Pharmaceuticals Ltd, an investor notices that many family members/relatives of the promoter family including a few Hindu undivided families (HUF) are being paid commissions and remunerations by the company.

As per the FY2020 annual report, page 166-168, during the year, Lincoln Pharmaceuticals Ltd paid out a total of ₹1.5 cr to the HUFs, wives, daughters and sons of the directors of the company in the form of commissions and salary expenses.

Entities and relatives of the MD of the company, Mr Mahendra G Patel:

  • Mahendra G Patel HUF: HUF of Mr Mahendra G Patel (MD): Commission: 23.60 lac
  • Kailashben M Patel: Wife of Mr Mahendra G Patel (MD): Salary Expenses: 11.50 lac
  • Nidhi H Patel: Daughter of Mr Mahendra G Patel (MD): Salary Expenses: 11.49 lac

Entities and relatives of the WTD of the company, Mr Munjal M Patel who is son of MD, Mr Mahendra G Patel:

  • Munjal M Patel HUF: HUF of Mr Munjal M Patel (WTD): Commission: 23.60 lac
  • Mansi M Patel: Wife of Mr Munjal M Patel (WTD): Remuneration: 20.79 lac

Entities and relatives of other directors of the company:

  • Ashish R Patel HUF: HUF of Mr. Ashish R Patel (WTD): Commission: 27.49 lac
  • Kalpanaben R Patel: Wife of Mr Rajnikant G Patel (Director): Salary Expenses: 5.45 lac
  • Dharmisthaben H Patel: Wife of Mr Hasmukh I Patel (WTD): Salary Expenses: 10.79 lac
  • Mansi A Patel: a relative of key managerial personnel: Salary Expenses: 16.39 lac

An investor may contact the company directly to understand more about these employees and the commission transactions. She may seek information that might help her to understand the value being added by these relatives/employees. She may ask for information like designations/attendance etc. to understand the value addition.

She should do her own due diligence to make up her mind about these transactions.

5.2) Sale/purchase transactions of Lincoln Pharmaceuticals Ltd with promoter entities:

Apart from the above-mentioned salary/commission transactions; there are instances of sales/purchases from promoter group entities.

For example, as per the FY2011 annual report, page 49, during the year, Lincoln Pharmaceuticals Ltd sold goods of about ₹15 cr, to Allantis Exim Pvt. Ltd, which is an entity controlled by key managerial persons. This seems like a transaction where the promoters bought goods from Lincoln Pharmaceuticals Ltd and subsequently exported/traded these goods using their personal entity (Allantis Exim Pvt. Ltd).

An investor may note that such transactions where the listed entity enters into sale/purchase transactions with promoter entities carry the risk of shifting the economic benefits from minority shareholders to the promoters. This is because, if the listed entity sells the goods to promoter entities at a lower price than what it can get in the market or it buys the goods at a higher price than what it can buy from the market, then the promoters benefit at the cost of minority/public shareholders.

5.3) Financing transactions of Lincoln Pharmaceuticals Ltd with promoter entities:

Similarly, an investor comes across many transactions where Lincoln Pharmaceuticals Ltd has taken and given loans to the promoter entities. For example, the company has been involved in many financing transactions with one of the entities, Downtown Finance Pvt Ltd, which is mentioned as an entity controlled by key managerial personnel/or their relatives. E.g. FY2019 annual report, page 154.

An investor may note that such transactions where the listed entity enters into financing transactions with promoter entities, also carry the risk of shifting the economic benefits from minority shareholders to the promoters. This is because, if the listed entity borrows money from the promoter entity at a higher interest rate than what it can borrow from the market or it lends money to the promoter entity at a lower rate than what it can get from the market, then the promoters benefit at the cost of minority/public shareholders.

To understand more about the related party transactions between the companies and their promoters and to appreciate the risks involved in such transactions, an investor may read the following article in detail.

Further advised reading: How Promoters benefit from Related Party Transactions

6) Purchase of Lincoln Parenteral Ltd (LPRL) from promoters:

While reading the annual reports of Lincoln Pharmaceuticals Ltd, an investor notices that the company started purchasing a stake in an entity, Lincoln Parenteral Ltd (LPRL). LPRL was a promoter group company, which had been disclosed as an entity controlled by key management persons in the FY2011 annual report, page 49.

From the credit rating rationale of Lincoln Pharmaceuticals Ltd prepared by CRISIL in April 2021, an investor notices that LPRL was established in 1991.

Lincoln Parenteral was incorporated in 1991 and manufactures dry powder, liquid injectibles, and syrup variants at its facilities in Ahmedabad (Gujarat).

Therefore, it might be a case that the company had been running its operations for the previous 21 years when Lincoln Pharmaceuticals Ltd decided to purchase it from the promoters.

i) First time, Lincoln Pharmaceuticals Ltd purchased a 62% stake in LPRL in FY2012 for ₹11.16 cr.

FY2012 annual report, page 27:

Lincoln Pharmaceuticals Ltd FY2012 Investment In Lincoln Parenteral Ltd

When Lincoln Pharmaceuticals Ltd purchased a 62% stake of LPRL from promoters at ₹11.16 cr, it indicated that the company valued the entire equity (100%) of LPRL at ₹18 cr (=11.16/0.62).

To assess whether the valuation of ₹18 cr for LPRL is low or high, an investor needs to assess the financial performance of the company.

The below table contains the financial performance of LPRL from FY2011 to FY2020, taken from the annual reports of Lincoln Pharmaceuticals Ltd from the section on performance of subsidiaries.

Lincoln Parenteral Ltd Financial Performance FY2011 FY2020

From the above table, an investor notices that in the previous year, FY2011, LPRL had a revenue of about ₹15 cr and net profit after tax (PAT) of ₹0.37 cr. Therefore, when Lincoln Pharmaceuticals Ltd put a valuation of ₹18 cr on LPRL, then it amounted to buying LPRL from the promoters at a price to earnings (PE) ratio of more than 48 times (18/0.37 = 48.65).

Soon after acquisition by Lincoln Pharmaceuticals Ltd, the financial performance of LPRL started declining. The revenue of LPRL declined about 50% in the next two years, from ₹15 cr in FY2011 to ₹7.6 cr in FY2013. At the same time, the profits also declined sharply. LPRL started reporting losses. From a profit of ₹0.37 cr in FY2011, LPRL fell into losses, which increased to (₹1.2) cr in FY2014.

ii) Second time, Lincoln Pharmaceuticals Ltd increased its stake in LPRL in FY2015 from 62% to 70.08%. To increase its stake by 8.08% (=70.08 – 62), Lincoln Pharmaceuticals Ltd paid a value of ₹1.42 cr because the investment by the company in LPRL increased from ₹111,600,000 in FY2014 to ₹125,849,430 in FY2015.

Lincoln Pharmaceuticals Ltd FY2015 Investment In Lincoln Parenteral Ltd

From the above disclosure, an investor would appreciate that when; in FY2015, Lincoln Pharmaceuticals Ltd purchased a stake of 8.08% in LPRL at ₹1.42 cr, then it valued the entire company at ₹17.57 cr (=1.42/0.0808).

When an investor notices the profits of LPRL for the previous year, FY2014, then she notices that LPRL reported a loss of (₹1.2) cr in the year. Therefore, we consider the profits of LPRL for the year FY2015 for doing the valuation. In FY2015, LPRL reported a PAT of ₹0.17 cr. If an investor calculates the valuation paid by Lincoln Pharmaceuticals Ltd for purchasing a stake in LPRL considering the profits of FY2015, then it comes at a price to earnings (PE) ratio of more than 103 times (17.57/0.17 = 103.35).

iii) Third time, Lincoln Pharmaceuticals Ltd increased its stake in LPRL in FY2016 from 70.08% to 98.58%. To increase its stake by 28.5% (=98.58 – 70.08), Lincoln Pharmaceuticals Ltd paid a value of ₹7.34 cr because the investment by the company in LPRL increased from ₹125,849,430 in FY2015 to ₹199,252,187 in FY2016.

Lincoln Pharmaceuticals Ltd FY2016 Investment In Lincoln Parenteral Ltd

From the above disclosure, an investor would appreciate that when; in FY2016, Lincoln Pharmaceuticals Ltd purchased a stake of 28.5% in LPRL at ₹7.34 cr, then it valued the entire company at ₹25.75 cr (=7.34/0.285).

When an investor notices the profits of LPRL for the previous year, FY2015, then she notices that in FY2015, LPRL reported a PAT of ₹0.17 cr. If an investor calculates the valuation paid by Lincoln Pharmaceuticals Ltd for purchasing a stake in LPRL considering the profits of FY2015, then it comes at a price to earnings (PE) ratio of more than 151 times (25.75/0.17 = 151.47).

Therefore, an investor notices that in the past, when Lincoln Pharmaceuticals Ltd purchased a stake in LPRL from its promoters, then it paid PE ratios of 48, 103 and 151 times, which look high from a valuation perspective.

Moreover, when an investor notices the financial performance of LPRL over the years, then she notices that the sales of LPRL are on a continuous decline for the last 5 years. The sales of LPRL have declined from a high of ₹111.5 cr in FY2016 to ₹44.5 cr in FY2020 (the last available financial data of LPRL).

An investor may contact the company directly to understand the reasons for purchasing LPRL from its promoters and the rationale for paying a PE ratio of 48, 103, and 151 while purchasing shares of LPRL from the promoters. She may ask the reasons for the continuous decline in the business of LPRL from the last 4-5 years.

She may ask the reasons why the LPRL despite being in existence from 1991 (i.e. 30-years) and being in direct control of Lincoln Pharmaceuticals Ltd from FY2012 has only reached a scale where it is able to earn profits of only about ₹2 cr. The investor may seek clarifications about the future plans of Lincoln Pharmaceuticals Ltd related to the manufacturing operations of the plant of LPRL.

An investor may note that currently, Lincoln Pharmaceuticals Ltd is in the process of merging LPRL with itself, which effectively means that is planning to increase its shareholding in LPRL from the current 98.58% to 100%. Therefore, going ahead, LPRL will cease to exist as a separate legal entity and only its manufacturing unit would continue to exist as a fixed asset on the balance sheet of Lincoln Pharmaceuticals Ltd.

Credit rating report of Lincoln Pharmaceuticals Ltd by ICRA in February 2021:

The scheme of amalgamation between Lincoln Parenteral Limited (“Transferor company) and Lincoln Pharmaceuticals Limited (Transferee Company) is currently under process.

An investor should be cautious while analysing transactions between the listed companies and their promoters and their group entities. This is because; such transactions have the potential of shifting the economic benefits from the public/minority shareholders to the promoters.

Further advised reading: How Promoters benefit from Related Party Transactions

7) Playing with accounting assumptions to report a higher profit:

While reading the annual reports of Lincoln Pharmaceuticals Ltd, an investor comes across instances where the company did not comply with the required accounting guidelines and, in turn, reported a higher profit. However, the statutory auditor of the company highlighted such non-compliance to the accounting guidelines to the shareholders in its report.

In FY2012, Lincoln Pharmaceuticals Ltd had faced very long delays in receiving money from some of its customers. It seems that there was a possibility that the company would not be able to collect money from them. As a result, the accounting guidelines require that the company should recognize this as a loss and make provisions for the same.

However, as per the auditor, Lincoln Pharmaceuticals Ltd did not recognize a loss on the entire involved amount. Instead, it only recognized a loss on only a part of the amount and did not recognize the loss of ₹2.15 cr. As a result, the company reported a higher profit than what it should ideally have reported.

However, the auditor of the company disagreed with this decision of Lincoln Pharmaceuticals Ltd and pointed out its disagreement in the annual report.

FY2012 annual report, page 40:

Attention is invited to Note No. 15 to the financial statement relating to trade receivables regarding short provision to the extent of ₹ 215.21 Lakh toward unsecured trade receivable considered as doubtful. Had full provision been made, the profit, reserves and trade receivables would have been lower to that extent.

In the next year, FY2013, Lincoln Pharmaceuticals Ltd repeated the same decision when it did not recognize an amount of ₹2.37 cr of receivables as a loss. Therefore, it reported a higher profit than what it should ideally have.

However, once again, the auditor of the company did not agree with this decision of the company and highlighted its disagreement as a qualified opinion in the annual report.

FY2013 annual report, page 15:

Basis for qualified opinion: Trade Receivable of the company is ₹ 7294.91 Lakh which includes trade receivable of ₹ 238.07 Lakh identified as doubtful debt by the management of the company. The company has provided ₹ 0.50 Lakh for Doubtful Debt as on the date of balance sheet. An additional provision for doubtful debt of ₹ 237.57 Lakh is required and accordingly, Trade Receivable, Net profit for the year and shareholder fund would have been lower by that amount.

An investor may contact the company directly to understand the reasons for such an accounting treatment by the company and why it did not rectify the accounting treatment despite the disagreement by the statutory auditor.

It is advised that in such instances where certain decisions of companies lead to a higher reported profit where the auditors of the companies do not agree with the same, an investor should adjust the profits accordingly while doing her analysis.

Further advised reading: How Companies Inflate their Profits

8) Non-compliance with guidelines of appointing the Chief Financial Officer (CFO):

In the FY2016 annual report, the secretarial auditor of the company highlighted that Lincoln Pharmaceuticals Ltd has not complied with the requirements of the Companies Act, 2013 because it has not appointed a CFO.

FY2016 annual report, page 15:

During the period under review the Company has complied with the provisions of the Act, Rules, Regulations, Guidelines, Standards, etc. mentioned above, Save and Except appointment of Chief Financial Officer under the provision of Section 203 of the Companies Act, 2013. However, the Company is in process of appointing the Chief Finance Officer.

As per the above disclosure, an investor would note that the company responded to the auditor that it is in the process of appointing the CFO.

However, despite its claims, the company did not appoint a CFO for the next two years. In the FY2017 as well as FY2018 annual reports, the secretarial auditor again highlighted the non-compliance with the requirements of the Companies Act 2013.

FY2017 annual report, page 23:

During the Audit period under review and as per the explanation and clarification given to us and presentation made by the Management, the Company has complied with the provisions of the Act, Rules, Regulations, Guidelines, Standards, etc. mentioned above, save and except appointment of Chief Financial Officer under provision of Section 203 of the Companies Act, 2013.

FY2018 annual report, page 21:

During the Audit period under review and as per the explanation and clarification given to us and presentation made by the Management, the Company has complied with the provisions of the Act, Rules, Regulations, Guidelines, Standards, etc. mentioned above, save and except appointment of Chief Financial Officer under provision of Section 203 of the Companies Act, 2013.

Finally, after about 4 years of continuously pointing out by the auditors, the company appointed the CFO in FY2019, three days before the end of the financial year on March 28, 2019.

FY2019 annual report, page 24:

During the period under review the Company has complied with the provisions of the Act, Rules, Regulations, Guidelines, Standards, etc. mentioned above except appointment of Chief Financial Officer (CFO) as per section 203 of the Companies Act, 2013 during the year, however the Company has appointed CFO on March 28, 2019.

Therefore, an investor would notice that the company delayed its compliance with the requirements of the Companies Act for appointing a CFO of the company for almost 4 years despite continuously pointing out by the secretarial auditor of the company.

An investor may note that such a non-compliance by the company was not limited to the appointment of the CFO. In FY2017, Lincoln Pharmaceuticals Ltd did not have the composition of its board of directors as per the Companies Act, 2013. The secretarial auditor highlighted that the number of independent directors on the board of the company was less than what is required as per the Companies Act, 2013.

FY2017 annual report, page 23:

The Board of Directors of the Company is duly constituted with proper balance of Executive Directors and Non-Executive Directors and in case of Independent Directors, number of Independent Directors appointed on the Board of Directors of the Company is falling short by requirement of appointing one Independent Director, as required under provision of section of Section 149(4) of the Companies Act, 2013

The above instances indicate that on multiple occasions, Lincoln Pharmaceuticals Ltd has not complied with the legal requirements. Moreover, in the case of the CFO, the company continued to avoid complying with the requirement for many years despite regular reminders by the secretarial auditor.

Further advised reading: How to read the annual report of a company

9) Weakness in the internal processes and controls of Lincoln Pharmaceuticals Ltd:

While analysing the annual reports of the company, an investor comes across numerous instances that indicate a history of weakness in the processes and controls at Lincoln Pharmaceuticals Ltd, which leave scope for improvement.

9.1) Weakness in control systems and maintaining proper records:

While reading the FY2014 annual report, an investor comes across an observation by the statutory auditor of the company highlighting that the company has not maintained proper records of its fixed assets.

FY2014 annual report, page 22:

The Company has not maintained updated records showing full particulars including quantitative details and situation of fixed assets.

Once again, in the FY2015 annual report, the auditor highlighted the requirement to strengthen the controls at the company.

FY2015 annual report, page 46:

In our opinion and according to the information and explanations given to us, the control system needs to be strengthened to make it commensurate with the size of the company and the nature of its business, for the purchase of inventory and fixed assets and for the sale of goods.

9.2) Delays in depositing undisputed statutory dues to the Govt. authorities by Lincoln Pharmaceuticals Ltd:

While reading the annual reports of the company, an investor notices that at times, the company failed to deposit its dues to the govt. even in the cases where there was no dispute about its liabilities.

For example, in the FY2015 annual report, the statutory auditor highlighted that the company, as well as its subsidiary, had delayed the deposit of undisputed dues like provident fund etc.

FY2015 annual report, page 46:

The holding company is regular in depositing undisputed statutory dues including sales-tax, duty of customs, duty of excise, value added tax. The holding company is also regular except in some cases, in depositing provident fund, employees’ state insurance and any other statutory dues, TDS, wealth tax and service tax with the appropriate authorities.

As reported by auditors of subsidiary companies, those companies, are regular in depositing undisputed statutory dues…except one subsidiary company which is regular depositing undisputed statutory dues except, in some cases, in depositing provident fund, employees’ state insurance and any other statutory dues, TDS, wealth tax and service tax with the appropriate authorities.

An investor would note that the above instances present an environment where there are weaknesses in the internal process and controls and in addition, non-compliance to the legal requirements continue despite reminders by the auditors. In such a situation, there are possibilities that unscrupulous elements may attempt to take benefit of the weaknesses and attempt to do fraud on the company.

In the case of Lincoln Pharmaceuticals Ltd, the company detected an incident where one of the employees did fraud on the company and took away ₹20 lac. The auditor highlighted it in its report in the annual report and mentioned that the company could recover the money from the employee.

FY2014 annual report, page 23:

Fraud: …we noticed that a fraud involving an embezzlement of 20 Lakh was committed by an employee of the company. The company has recovered the loss from the employee.

Therefore, an investor would notice that when the internal processes and controls of any company are weak and there are instances of non-compliance with legal requirements, in such an environment, there is a high probability of frauds going undetected.

An investor may read another example in the case of National Peroxide Ltd, a Wadia Group company, where the managing director of the company attempted to take advantage of the weaknesses in the internal processes and controls and did fraud on the company: Analysis: National Peroxide Ltd

10) Certain corporate decisions by Lincoln Pharmaceuticals Ltd:

While reading about the business history of the company, an investor comes across certain decisions taken by the company that do not look like an optimal utilization of time and resources of the company and its management.

Let us analyse some of these decisions.

10.1) First, a share split from FV ₹10/- to FV ₹2/- and then a consolidation (reverse share split) from FV ₹2/- to FV ₹10/-:

While analysing the FY2006 annual report, an investor notices that Lincoln Pharmaceuticals Ltd had split its one share of face value (FV) ₹10/- into five shares of FV ₹2/-.

FY2006 annual report, pages 1-2:

SUB-DIVISION OF SHARE: During the year under review, the Company has Subdivided the existing share capital of Rs. 9,00,00,000 (Rupees Nine Crores Only) divided into 90,00,000 (Ninety Lacs) equity shares of Rs. 10/- each in to Rs. 9,00,00,000 (Rupees Nine Crores Only) divided in to 4,50,00,000 (Four Crores Fifty Lacs) Equity Shares of Rs. 2/- each.

However, an investor notices that within a few years, the company did a U-turn on its decision. In FY2009, the company did a reverse share split i.e. consolidation of its shares where it consolidated five shares of FV ₹2/- into one share of FV ₹10/-.

FY2009 annual report, page 11:

Company has consolidated 5 equity shares of Rs. 2/- each fully paid up in to one equity share of Rs. 10/- each.

An investor would notice that the process of a share split involves many steps like approval by the board of directors, approval by the shareholders, communications with stock exchanges and registrar and other operational formalities. All these steps consume precious time and resources, both person-hours and money.

In the case of Lincoln Pharmaceuticals Ltd, it had to spend the resources twice; first, when it did the share split and second, when it did the consolidation. Therefore, it seems like a non-optimal utilization of time and resources by the company.

Many times, companies split their shares when the share price increases to very high levels, which starts to affect the liquidity in its stock market transactions. At such time, doing a share split brings down the price of each share and increases the number of shares in the market. As a result, the trading activity/liquidity in the share increases.

However, in the case of Lincoln Pharmaceuticals Ltd, the share price in FY2006 was in the range of ₹24 to ₹58, which is not high. Therefore, in such a situation doing a share split followed by a consolidation does not look like the best utilization of time and resources of the management, directors and the shareholders.

An investor may contact the company directly to understand the reasons and the perspective of the company for doing the share split followed by the consolidation of shares.

10.2) An NBFC subsidiary: formation, name change and then dissolution in quick succession:

While reading the FY2018 annual report, an investor gets to know that Lincoln Pharmaceuticals Ltd had formed a wholly-owned subsidiary named “Savebux Finance & Investment Private Limited” and has applied to Reserve Bank of India (RBI) for its registration as a non-banking finance company (NBFC).

FY2018 annual report, page 14:

During the year under review, the Company has incorporated a Wholly-Owned Subsidiary Company “Savebux Finance & Investment Private Limited in India with an initial investment of 2 Crore. The Company is in process of receiving the Certificate of Registration (COR) from Reserve Bank of India for Non-Banking Finance Company (NBFC).

An investor would appreciate that formation of a dedicated NBFC subsidiary by a manufacturing company seems like unrelated diversification that may not be the best utilization of the company’s resources.

However, the very next year, in FY2019, an investor gets to know that Lincoln Pharmaceuticals Ltd has changed the name of the subsidiary from “Savebux Finance & Investment Private Limited” to “Savebux Enterprise Private Limited”.

FY2019 annual report, page 20:

Savebux Enterprise Private Limited [Formerly known as Savebux Finance & Investments Private Limited (Wholly-Owned Subsidiary Company)

From the decision of Lincoln Pharmaceuticals Ltd to change the name of the subsidiary from finance & investments to enterprises, an investor may think that the plans of the company have changed. It may seem that Lincoln Pharmaceuticals Ltd no longer wants to get involved in financing activities; however, it wishes to use the new subsidiary for manufacturing/trading activities.

However, the very next year, FY2020, an investor reads that this subsidiary has applied for a voluntary liquidation/winding-up process.

FY2020 annual report, page 164:

During the year under consideration, subsidiary of the company namely “Savebux Enterprises Private Limited (Under Liquidation)” has applied for voluntary winding up process and pursuant to the same Insolvency Professional has retuned capital contribution of ₹ 195.00/- Lakhs to the company

From the above disclosure, an investor would appreciate that under Indian laws, the process of closing down a company is also time-consuming that involves appointing an insolvency professional and applying to National Company Law Tribunal (NCLT). Only after the approval of NCLT, a company ceases to exist.

It took about a year for Lincoln Pharmaceuticals Ltd to receive all the approvals for closing down the subsidiary. In March 2021, the subsidiary was finally dissolved when the approval of NCLT was received.

Corporate announcement to BSE, March 31, 2021:

Company has received an order passed by Hon’ble NCLT for dissolution of M/s. Savebux Enterprises Private Limited (a Wholly Owned Subsidiary) of the Company on March 26, 2021 under Section ·59 of the Insolvency and bankruptcy Code. 2016. Accordingly the said Company stands dissolved w.e.f. March 03, 2021 i.e. the date of passing of the order.

In this entire exercise of forming a wholly-owned subsidiary and then liquidating it, an investor would appreciate that many aspects of the decisions of Lincoln Pharmaceuticals Ltd do not appear optimal utilization of time and resources.

Lincoln Pharmaceuticals Ltd first formed a finance-focused subsidiary, which is not the core area of operations of the company. Forming a new subsidiary and the application to RBI for the NBFC license involves the work of multiple people like chartered accountants (CA), company management and board/authorized signatory. Later on, it changed the name of the company, which again is a time and resource consuming-exercise involving the work of CAs, company management and board of directors.

Thereafter, Lincoln Pharmaceuticals Ltd decided to liquidate the subsidiary, which is a more cumbersome process with applying to the court, appointing of insolvency professional etc.

Looking at all these steps taken by Lincoln Pharmaceuticals Ltd within a short time, it seems that the entire time of the life of existence of the subsidiary was spent in one application or the other related to either registration, name change or dissolution. It looks that Lincoln Pharmaceuticals Ltd could have utilized the time and resources of the company, the board of directors, company management and the shareholders more efficiently.

An investor may contact the company directly to understand the reasons for forming a finance-focused subsidiary, the reasons for changing the name of the company and then dissolving it within a very short period.

Further advised reading: Why We cannot always Trust What Management Claims

11) Information presented by Lincoln Pharmaceuticals Ltd in the annual reports:

While reading the annual reports of the company, an investor comes across a few instances where she notices that the information provided by Lincoln Pharmaceuticals Ltd in the annual reports can be improved.

Let us see some of such instances.

11.1) Disclosure of related party transactions by Lincoln Pharmaceuticals Ltd:

While reading the FY2018 annual report, in the related party transactions section, an investor notices that Lincoln Pharmaceuticals Ltd had transactions with many relatives (wife, daughter etc.) and HUFs of the directors by way of commission and remuneration/salary. We have discussed a few such transactions in the article above.

While analysing these transactions in the FY2018 annual report, an investor notices that as per the column for the previous year data (FY2017), Lincoln Pharmaceuticals Ltd had such transactions with the HUFs and relatives of the directors in FY2017 as well.

In the data of the related party transactions from the FY2018 annual report shown below, an investor may focus on the transactions with:

  • Manasi M. Patel: Wife of Mr. Munjal M Patel (WTD): Remuneration: 810,000 (FY2018) | 520,000 (FY2017)
  • Kailashben M Patel: Wife of Mr. Mahendra G Patel (MD): Remuneration: 820,000 (FY2018) | 650,000 (FY2017)
  • Kalpanaben R Patel: Wife of Mr. Rajnikant G Patel (Director): Remuneration: 624,167 (FY2018) | 910,000 (FY2017)

FY2018 annual report, page 154:

Lincoln Pharmaceuticals Ltd Related Party Transactions FY2018

From the above data, an investor would notice that Lincoln Pharmaceuticals Ltd paid remunerations to Ms Manasi M. Patel, Ms Kailashben M Patel and Ms Kalpanaben R Patel in FY2017 as well. Moreover, the investor would appreciate that Mr. Munjal M Patel (WTD), Mr. Mahendra G Patel (MD) and Mr. Rajnikant G Patel (Director) were a part of the board of directors in FY2017 as well.

FY2017 annual report, page 1:

Lincoln Pharmaceuticals Ltd Board Of Directors FY2017

Therefore, an investor would appreciate that because that Mr. Munjal M Patel (WTD), Mr. Mahendra G Patel (MD) and Mr. Rajnikant G Patel (Director) were a part of the board of directors in FY2017. As a result, Ms Manasi M. Patel, Ms Kailashben M Patel and Ms Kalpanaben R Patel who are related to them as a spouse, tend to be a related party. Therefore, an investor would assume that the remuneration paid by Lincoln Pharmaceuticals Ltd to them in FY2017 would be disclosed in the section on related party transactions.

However, when an investor analyses the section of FY2017 containing related party transactions, then she notices that their names and the remuneration transactions are not mentioned under related party transactions in FY2017.

FY2017 annual report, page 72:

Lincoln Pharmaceuticals Ltd Related Party Transactions FY2017

From the above discussion, an investor would note that in the related party transactions of the FY2017 annual report, Lincoln Pharmaceuticals Ltd has not disclosed the names of Ms Manasi M. Patel, Ms Kailashben M Patel and Ms Kalpanaben R Patel and the remuneration paid to them in FY2017.

An investor may contact the company directly to understand the reasons for not disclosing the names of relatives (wives) of directors and the remuneration paid to them in the annual report.

Further advised reading: How Promoters benefit from Related Party Transactions

11.2) Errors in the data provided by Lincoln Pharmaceuticals Ltd in the annual reports:

While analysing the annual reports, an investor comes across a few instances where the data presented by Lincoln Pharmaceuticals Ltd in the annual reports are erroneous.

Let us see a few such instances.

In the FY2018 annual report, while analysing the indebtedness table on page 30, an investor notices that there is a totalling error while calculating the total debt at the end of the year.

Lincoln Pharmaceuticals Ltd Indebtedness Table FY2018

In the above section, an investor would notice that the debt at the start of the year was ₹5,123.84 lacs. During the year, the debt increased by ₹602.46 lacs. Therefore, at the end of the year, the total debt should be ₹5,726.30 lacs (= 5,123.84 + 602.46). However, an investor notices that in the indebtedness table, the company has shown the total debt at the end of the year as ₹5,467.96 lacs, which seems incorrect.

An investor may contact the company directly to understand whether this is a typographical error or there is some other data, which is missing in the indebtedness table.

An investor comes across another such instance of an error in the annual report when she analyses the shareholding pattern of the company in the FY2018 annual report on page 25.

Lincoln Pharmaceuticals Ltd Shareholding Details FY2018

The investor notices that in the shareholding details table, the Indian promoters’ holding at the start of the year should be 33.18% (=27.72 + 5.46) instead of the 40.68% shown in the annual report. Similarly, the change in the Indian promoters’ shareholding during the year should be either 1.03% or 1.04% (due to rounding off), which is the difference between 33.18% and 32.14% (the shareholding at the end of the year).

However, here also, Lincoln Pharmaceuticals Ltd showed the change in the Indian promoters’ holding during the year at 8.54%, which seems to be incorrect.

An investor may contact the company directly to understand whether this is also a typographical error or there is some other data, which is missing in the shareholding pattern table.

Further advised reading: How to read the annual report of a company

The Margin of Safety in the market price of Lincoln Pharmaceuticals Ltd:

Currently (September 3, 2021), Lincoln Pharmaceuticals Ltd is available at a price to earnings (PE) ratio of about 10.2 based on consolidated earnings of the last 12-months (July 2020-June 2021). An investor would appreciate that a PE ratio of 10.2 offers some 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, which 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, even 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.

Analysis Summary

Overall, Lincoln Pharmaceuticals Ltd seems a company, which has grown its sales at a growth rate of 9% year on year along with an improvement in profitability over the last 10-years. Until FY2016, the company’s sales were growing at a fast pace of 20%; however, it had low operating profit margins (OPM). After FY2017, the company stopped low margin trading and domestic generics business and focused on high margin exports business. As a result, the sales growth moderated to about 4% per year; however, the OPM increased to 21% in FY2021.

The company has been able to grow its sales using its business profits and has repaid its entire debt. It became debt-free in FY2021. However, in the past, on multiple occasions, it had diluted its equity to raise money by way of preferential allotment of shares and warrants. It seems that almost whenever the company raised money from equity dilution, it gave it out as inter-corporate deposits to others. Even otherwise, Lincoln Pharmaceuticals Ltd had regularly given out loans and advances to others. On March 31, 2021, it had given out loans of about ₹44 cr to others.

The next generation of the founder-promoters has joined the business and the company seems to have a succession plan in place. The company seems to have many transactions with relatives and entities controlled by promoters like lending, sales/purchase, commission, and remuneration etc. Lincoln Pharmaceuticals Ltd has purchased one of the companies owned by promoters where it seems that the company paid a rich valuation for acquisition. An investor needs to analyse such transactions in detail.

At times, Lincoln Pharmaceuticals Ltd has not disclosed spouses of promoters/directors as related parties in the annual report. As a result, the company did not disclose the transactions it did with them. Therefore, an investor should be cautious while analysing the disclosures done by the company.

There have been many occasions where Lincoln Pharmaceuticals Ltd has either used accounting assumptions to show a higher profit, not complied with the requirements of the Companies Act, did not maintain proper records of purchase of inventory, fixed assets, and sales of goods etc. The weakness of internal processes and controls seems to have led to a fraud on the company by one of its employees.

At times, Lincoln Pharmaceuticals Ltd had taken decisions, which show a sub-optimal utilization of resources and time of the management. It first split the shares from FV ₹10/- to ₹2/-; however, within a few years, it again consolidated its shares from FV ₹2/- to ₹10/-. Recently, it first established a subsidiary and applied for an NBFC license from RBI; however, soon thereafter, it first, changed the name of the subsidiary and then dissolved it. These activities have consumed time and resources, which could have been optimally utilized in other activities.

Going ahead, an investor should focus on the growth of the company in domestic as well as in export markets along with the profit margins. Declining profit margins may indicate commoditization of its products and a loss of pricing power. She should closely monitor events related to the continued status of its approvals from drug authorities of its target countries.

The investor should closely monitor the collection of receivables by the company as it has to give a long credit period to overseas customers and at times, a significant amount of receivables have become credit-impaired.

The investor should keep a close watch on the loans/ICDs being given out by the company and also keep a track of all the transactions of the company with its promoters/relatives and their entities. She should see if the company raises more capital by equity dilution in future and if so, then how the company uses it. She should closely analyse the annual reports of the company for any signs of non-compliance with legal regulations and weaknesses in processes and controls.

Further advised reading: How to Monitor Stocks in your Portfolio

These are our views on Lincoln Pharmaceuticals Ltd. However, investors should do their own analysis before making any investment-related decisions 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

I hope it helps!

Regards,

Dr Vijay Malik

P.S.

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.

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12 thoughts on “Analysis: Lincoln Pharmaceuticals Ltd

  1. Dear Sir,
    I recently read your analysis report on AksharChem (India) Limited and found it very useful. In that analysis, you have pointed out that the company has made investments in more than 20 public Ltd companies. I noticed the same action in a company that I analysed a month ago, which had an even more number of investments. My question is, after noticing such action as stated above, should investors draw a conclusion that management is just interested in making money than doing business or is it completely fine.

    • Dear Om,

      Thanks for writing to us!

      We would be happy to provide our inputs to your query. However, we would request you elaborate on your thoughts about how an investor should interpret such investments. We would be happy to provide our inputs on your line of thought on this issue.

      Regards,
      Dr. Vijay Malik

  2. Operating profit is calculated as operating income less operating expenses. Depreciation, which is although a non-cash item, is still an operating expense. A website like Screener is computing operating profit without deducting depreciation from it. They are treating it as if it is a non-operating expense, which is completely irrational because it will be going to impact the operating profit margin.

    • Dear Anmol,

      We advise that investors should keep on tweaking financial ratios as per their preferences and if the tweaked ratios provide them good results, then they can continue using them. Therefore, you may tweak the operating profit margin by including depreciation and see if it works the way you wish it to work.

      The Export to Excel feature of Screener provides a good tool to tweak the ratios as per investors’ preferences. The following article will help you in understanding how to use the Export to Excel feature of Screener:

      How to Use Screener.in “Export to Excel” Tool

      Regards,
      Dr Vijay Malik

  3. Sir, I have seen in many interviews of big investors including Warren Buffett, wherein they are able to calculate the net worth of any business, which is higher than the current net worth. Could you please explain the technique that they use to determine the net worth of any business and what method do you use to find the net worth of any company?

  4. Sir, is it ok if more than one private limited companies (non-venture capitalists) have a significant amount of holding in any public limited company?

    • Dear Om,

      We request you to write your thoughts on this aspect. If you think that a lot of private limited companies (non-venture capitalists) in the shareholding is a cause of concern, then why do you think so. Also, if you believe that it is not a cause of concern, then why do you think so.

      We shall be happy to provide our inputs to your line of thought.

      Regards,
      Dr Vijay Malik

  5. What is more interesting in your analysis is that multiple equity issuances or warrants are converted to ICD, which is covered at the end. I read this first in your analysis.

  6. Sir, your articles based on investing are very helpful to retail investors. This website and you are like a gem to many retail investors and is being very helpful to me to gain knowledge about investing.
    It would be very good if you could make an article on analysing and finding business MOAT in a company. As the presence of MOAT is a crucial aspect necessary while analysing the company!
    Thank you.

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