This article provides a fundamental analysis of Pochiraju Industries Ltd, an Indian player in floriculture, pharmaceutical and biopharmaceutical space.
In order to benefit the maximum from this article, an investor should focus more on the process of analysis instead of looking for good or bad aspects of the company. She should learn the interpretation of different types of data and transactions and pay attention to the parts of annual reports etc used to get the information. This will help her in improving her stock analysis skills.
Pochiraju Industries Ltd Research Report by Reader
Q: Hello Vijay Sir,
I am planning to invest in Pochiraju Industries Ltd, but have a mixed feeling and not able to make up my mind whether it is going to be a good investment. I find it to be a good stock to invest, however, last 3yrs average numbers are not very inspiring when compared with 5yrs and 10yrs average. It will be helpful if you can share your thoughts on the same.
Pochiraju Industries Ltd has 3 divisions namely – pharmaceuticals (generic drugs), biotech (cancer and oncology drugs) and agriculture (horticulture – different types of roses). They have a nice long list of medicines that they make but truly speaking I have not seen their medicines (at least in western India) and I am not a doctor so have Ltd knowledge in differentiating drugs from one company w.r.t another.
Main features of Pochiraju Industries Ltd:
- current market rate Rs. 70
- compounded Sales Growth => 10yrs =>47.7%, 5yrs = 27.34%, 3yrs = 29.26%
- compounded Profit Growth => 10yrs => 31.87% 5yrs = 1.26%, 3yrs = -4.0%
- RoE => 10yrs => 12.61%, 5yrs = 10.07%, 3yrs = 8.58%
- P/E => 7.28
- CMP/BV = 0.87
- Dividend payout => no dividend
- EPS = 2.5 for last 2 quarters
- 52 week high/low => 7.5 / 88
Concerns:
- 40Cr debt
- operating profit margin and net profit margin for 2014 & 2013 is less compared to previous years.
- Promoters hold around 33% (though this has remained same for last many years)
- last 3yrs average do not show a very good numbers when compared to last 5yrs& 10yrs average.
- Mainly catering to Indian markets
- Not sure whether they have any new formulation lined up, which is waiting government clearance.
Dr Vijay Malik’s Response
Thanks for writing to me.
I appreciate the time & effort you have spent in studying the company and bringing out the right issues. This is an indispensible habit for any investor. I wish you the best on your investing journey.
Financial Analysis of Pochiraju Industries Ltd:
You have rightly pointed out that since last 2-3 years; Pochiraju Industry Ltd’s performance has been lackluster. Let’s try to analyze the reasons behind the same.
Diversification in an Unrelated Business Segment:
The main reason seems to be the diversification in an entirely unrelated industry. I do not see much reason for a flower/horticulture processing company making drugs, bio-pharmaceutical products. Anyway, they have already ventured into this segment and have taken debt to fund the capital expenditure.
Increasing Debt:
Debt of Pochiraju Industries has increased from INR 2 cr. in FY2010 to INR 31 cr. in FY2014. As per credit rating agency, CARE Ltd, company has plans for raising further debt. The rating rationale published by CARE in July 2014, mentions that Pochiraju Industries is planning to raise further INR 25 cr, which would increase the debt further. It seems the company is moving from the path of low capex floriculture business to heavy capex pharmaceutical business and the capital structure is bearing the burnt.
CARE has assigned Pochiraju Industries, a credit rating of BB, which means that there is high probability of default by the company while repaying its lenders. It is advised that an investor should not invest in any company below credit rating of BBB-.
Growth at the Cost of Profitability:
The financial performance of Pochiraju Industries reflects that the company is growing but at the cost of profitability. Both operating profit margins and net profit margins have suffered. One fact to be noticed is that the tax rate of the company has been very low and irregular. An investor should find out the tax incentives that the company is enjoying.
Operating Efficiency Analysis of Pochiraju Industries Ltd:
Company has missed out publishing cash flow statement for FY2014 in its annual report. If we compare results of 9 years (2005-2013), cumulative profit is INR 76 cr. where the cash from operations is only INR 32 cr. As the company is not able to convert its profits into cash, it is relying more on other sources of debt like financing to fund its cash requirements, which is visible from increasing debt levels. Pochiraju Industries’ working capital and other operating efficiency parameters like inventory turnover, asset turnover are deteriorating.
Overall, Pochiraju Industries does not seem to be a good business to enter into currently. It has entered into an entirely unrelated business area, which does not seem to be going on well for the company. It might or might not succeed in these new business lines, but it is better to wait and see the results and then invest hard-earned money into the company.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
These are my views about Pochiraju Industries. You should do your own research before making any investment decision about Pochiraju Industries Ltd.
You may use the framework described in the article on detailed analysis of a company to build upon the analysis done by you earlier:
How to Conduct Detailed Analysis of a Company
Hope it helps!
Regards,
P.S.
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Disclaimer
Registration status with SEBI:
I am registered with SEBI as a research analyst.
Details of financial interest in the Subject Company:
I do not own stocks of the companies mentioned above in my portfolio at the date of writing this article.
