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Marksans Pharma Ltd-Q4FY21 Analysis

June 11, 20219:38 pm
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Marksans Pharma Ltd came out with its amazing fourth quarter result where the company had the best ever profit margin at 24%. But the latest news of fund raise by the company has taken all the limelight.

In this blog, I will cover:

1. Inconsistencies in the Q4FY21 number due to policy changes

2. Reason for increase in profits

3. Consistent improvement in the numbers over the years

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4. Planned CAPEX

5. Investment by Orbimed 

I have written two more blogs on Marksans Pharma, which you can read here:

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Marksans Pharma Ltd- Analysis

Marksans Pharma Ltd-Q3FY21 Analysis

Marksans Pharma Ltd-Q4FY21 Analysis

Marksans Pharma Ltd-Q4FY21 Analysis

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Marksans Pharma Ltd-Q4FY21 Analysis

Inconsistencies in Numbers:

There was some puzzling questions regarding the strange increase and decrease of values of certain line items, one of which I had pointed out in the blog ‘ Marksans Pharma Ltd-Q3FY21 Analysis‘  and explained as well.

In Q4FY21 again, there were similar movement in some of the other items. The major one was ‘Other Expenses’  which dropped by 47% YoY(Year on Year) and 42% QoQ(Quarter on Quarter). And there has been significant drop in ‘Depreciation‘ cost.

In the conference call, the CFO explained that all these has been happening due to certain reclassification of numbers and this is the end of it. Now onwards the accounting policy will be consistent.

Now, let me explain the reason behind these numbers:

1. Explanation on the reason for drop in ‘Other Expenses’: Earlier freight expenses totally came under Other Expenses.  Now, this logistic cost is split into 2 parts ‘Freight Inward’ and ‘Freight Outward’. Freight inward goes into ‘Cost of goods sold’ and ‘Freight Outward’ continues to be a part of ‘Other expenses’. Basically, implying Gross margin could have been better but due to the decision to move ‘Freight Inward’.

2. Explanation on the reason for the drop in ‘Depreciation’: The decline has been change in the accounting policy of amortization. 

The drop in Depreciation value in Q3FY21 was explained as ” Marksans had licenses in UK which were yet to be commercialized and amortizing of carrying value in the balance sheet was being done at normal run rate. During Q2FY21 Marksans team in UK took a call that these licenses need accelerated rate of amortization. This was done in Q2FY21 as a one off and hence depreciation and amortization is back to normal in Q3FY21.”

Financial Analysis Q4FY21 Marksans Pharma Ltd:

There was slight drop in the revenue for the company both on QoQ and YoY. The management explained that it was due to delay in shipment due to lockdown in Goa. Approx ₹20 cr worth of revenue got delayed. 

In the last 2 years the API prices have increased significantly and has become unrealistic. To keep the steady supply of raw material amidst the lockdowns, the company has stored large amount of API as inventory. The inventory stood more than ₹400+ cr at the end of March’21 which is much larger than its historical levels. I guess  that may be one of the reason for the improved margin(lower cost inventory).

Key factors helping the company in improving the margin: Operating leverage, optimized product mix and most importantly the US business.  Marksans acquired US based TimeCap lab in 2015. Marksans had been trying aggressively to  move this third party manufacturer business towards front end. Looks like that has started to bear fruits now. Also, there exists  Large soft gel capsule market in US which is under-penetrated & hence offer higher margins.

Though the management has asserted that it wont be sensible to expect the same level of profitability.

Marksans Pharma Ltd- Analysis

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As you can observe the complete transformation of the company since FY18 on an yearly basis: 

  1. Marksans has consistently improved margins
  2. Moved from B2B to B2c primarily in US & UK markets via acquisitions
  3. Increase in inventory days are reflective of the move from B2B to B2c.
  4. Fixed asset turnover represent higher sweating of assets

Let me share my take on the recent announcement of fund raise by the company:

Planned Capex:

The management of Marksans Pharma had estimated an Capital Expenditure of ₹200cr for the next 2 years that will go in setting up API facility and equally in expanding the formulation business. And that was to help Marksans Pharma Ltd reach its revenue target of ₹2000cr.

Investment by Orbimed

On June 10th,2021, Marksans released a disclosure regarding its board meeting. It stated that OrbiMed Asia IV Mauritius will be putting in fresh capital to the tune of massive ₹365cr.

Orbimed is US headquartered investment firm focused on investing in healthcare space. It is world’s largest healthcare dedicated fund with an Asset Under Management of ₹21bn.

Other investment by Orbimed in India: Advanced Enzymes 

Orbimed will be subscribing to 4.9cr of convertible warrants, which will take its shareholding to 10.7% whereas the promoter shareholding will reduce to 43.2% from current level of 48.25%.

This came as a total surprise given that Marksans Pharma Ltd is a debt free company sitting on a cash pile of ₹212cr which is more than enough to take care of its ₹200cr of capex plan. 

So what will be the use of this ₹365cr?

My bet will be on some large acquisition opportunity. Let us wait till the next intimation by the company on the same.

 

Further reading:

Indigo Paints Ltd- IPO Review

Indigo Paints Ltd- Q4FY21 Analysis

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Shekhar Yadav

I am a full time stock market investor. The blog is an extension of my research, thoughts & opinion. Please don't consider anything on this website to be an investment advise.

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