Albert David - Potential Bagger?

Stock Opportunities Untested - but worth a good look
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Albert David Ltd (ADL), a part of the well-known Kolkata based ‘House of Kotharis’ is distinguished in the field of manufacturing Pharmaceutical Formulations, Infusion Solutions, Herbal Dosage Forms, Bulk Drugs, Disposable Syringes & Needles.

It made a modest start in 1924 with a single manufacturing facility. Today, it has three manufacturing units located in Kolkata in West Bengal, Ghaziabad in U.P. and Mandideep in M.P. Its Kolkata plant is USFDA approved whereas the other two plants are WHO CMP & ISO 9002 certified. Some of its bulk drugs are also certified by the UK and the European Council.

ADL has a strong presence in various drug therapeutic classes like Immunomodulators, Vitamins & Nutritional Supplements, NSAIDs, Apetite Stimulants, Liver Protective, Anti-Ulcerants, Laxatives, Anti-Arthiritic Preparations, Muscle Relaxants and Adaptogenics among others. In the current year, it introduced new formulations in segments like anti-asthmatics, anti-ulcerants, another proton pump inhibitor and nutritional supplements. It also plans to venture into the pre-probiotic, infertility and nutraceuticals market.

With an extensive network of 1600+ stockists, ADL’s products are available all across India. It also has a presence in South East Asia, Africa, Middle East, Europe, USA and Latin America, covering approximately 35 countries.

The Company expects to achieve a turnover of Rs.400 crore in FY17. Its market cap is closer to Rs.200 crore, which is cheap when compared to other small-cap and mid-cap pharma companies which trade at a market cap:sales ratio of between 2x to 3x as against ADL’s 0.5x. It reported an EPS of Rs.15 in H1 FY16 and is trading at a P/E of 11x if we annualized the performance.

ADL has a small equity capital of Rs.5.71 crore supported by reserves of Rs.130 crore. The promoters hold 60.9% of the equity capital and the balance is held by the investing public.

Recently, the Company sold one of its brands ‘Actibile’ to Zydus Healthcare for Rs.55 crore. With a market cap of just Rs.177.7 crore and one of its brands reaping Rs.55 crore, the Company has made me take a tracking position in the stock.

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this is an exceptional item. yet company has added this to its CFO. is this ok or an instance of aggressive accounting?

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That’s an interesting find.

Few Points:

  1. Sales for FY17 will be muted. The company in its FY16 AR has mentioned: “The Year of 2016-2017 will be very challenging as the competition will grow more fierce in this highly regulated market.” Selling of Actibile will contribute to this as it constituted around 5% of total sales.

  2. The operating margin seems to be sustainable at around 9-10%. Net profit margin (excl. exceptional item) for FY16 has reduced significantly to around 2.25% from an average of 4.30% in previous 4 years.

  3. The company has been consistently generating FCF and has shared them with shareholders as dividends.

  4. The company has not diluted equity in past 10 years which is a good sign. They have been able to fund capex through internal accruals and debt, which also they have significantly reduced from 42 Cr in 2014 to 20 Cr. in 2016. This has improved their short-term credit rating by CRISIL from A2+ to A1 and reaffirmed long-term credit rating of A-/positive.

  5. No succession plan in place. Age of all KMP’s is above 63. Could this be the reason for selling "Actibile’?

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Can someone who understand pharma throw some light on the prospects of the company and industry considering Albert David’s products? Also, I could not find capacity utilisation for their 3 plants in AR. Need to dig deeper but if someone has this information then please share.

Discl.: Not invested.
P.S.: INDIANIVESH CAPITALS LTD. (Daljeet Kohli) has bought 19866 shares on 31/03/2016.

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No growth here. It is pretty old company. If company is forced to sell pieces of operating biz it is not something great unless they have a game plan to invest in high growth areas.

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i have been on their Mandideep factory twice. The unit has huge scalability as well as land area but the management seems to have completely forgotten about this unit. Once a best factory in that region, it is currently running under capacity and barely breaking even. I do not follow this company but i think it has huge potential provided the mngt takes on a more agressive outlook. Else the company could stagnate hereforth.
Disclosure: My answer is based on only one of their three units.
I do have capacity utilisation and financials but not authorised to disclose.
Nor invested nor tracking.

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FYQ1 Results: http://www.bseindia.com/xml-data/corpfiling/AttachLive/4de8cf3b-feac-4c2f-a331-ee9e41ae9e4b.pdf

Not a good set of numbers. Sales down due to de-stocking

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If sales is down only due to destocking, it should not be an issue as it is one-time event.

Can anyone clarify on destocking. Does it mean distributors and retailers dont buy from company but company still manufactures and keep it as finished goods (or) company itself dont manufacture in order to reduce current inventory to negligible amount ?

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The company might be in for better times and is worth a look now. Last quarter results were quite positive showing a PAT of 5 cr+ . They have appointed a new CEO who has worked with good companies in the past .

  1. Reducing employee costs - He has called out that his focus will be on improving employee productivity - increasing per employee sales throughput and maybe removing unnecessary staff - if unions are not a hindrance. This is visible in sales of last quarter where sales have gone up yoy by 20%+ and more importantly - employee costs have come down yoy. (Current employee costs are 28% of sales + compared to average below 20% for MNC and other domestic pharma companies). The new CEO has clearly said he will focus on this aspect of the business

  2. Closing down of Mandideep factory which was loss making. I think they sold only injectibles from here which were not making money. So that is good for the bottom line ( with little impact on the top line)

  3. Bottomline can improve significantly and if growth also comes back - that is the icing on the cake

If anyone has more information - would love to hear

Disc : Invested at market cap of Rs.240 Crores (currently it is 10% lower)

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Mr. Parmar seems to have been true of his word.

Q4 delivered PBT of 13 crores and Mandideep plant has been put up for sale- mentioned in notes results.
Co is having 70 cr cash on books…and plant can fetch another 40-50 crores.
Mkt cap is 250 crs only.
Seems focus on growth from this yr onwards.

In terms of valuations, this is at 0.7 mkt cap to sales, and EV/EBITDA is unbelievably low!

The last 10 yr dividend payout track record is very good which clears corporate governance as well!

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It would appear that the company is going through a business restructuring process given the backdrop of the below:

  • appointing an experienced industry professional as CEO in Jan’17 and elevating him as MD&CEO in Apr 18,
  • taking decision of closing Mandideep plant which used to manufacture syringes and needles - a very competitive industry with not much special skills/expertise required, no brand value, less sales contribution to overall sales of the company, loss making for the company,
  • which results in focus on the core pharma drugs/formulations business
  • attractive cash balances, and company’s potential to generate good operational cashflows (see the receivables, payables and inventory levels of fy18 vs fy17)
  • these cash balances provide ready capital for growth, if management decides to focus on it
  • company sold a brand contributing about 15cr of sales for 55cr, implying (probably) that the brands they have retained are more valuable

The quarterly sequential numbers are interesting. The company has given break up of financials from continuing operations (CO) (from Sep quarter). It is expected that the loss from discontinued operations (DO) will eventually cease and hence the numbers from continuing operations should be focused on.

I have excluded other income from calculations with assumption that if the company focuses on growth, much of the capital employed will come from the ready cash available, and hence other income would reduce (assuming that all the other income is from cash balances, which is not the case if you see breakup of OI from FY16 and 17 AR - however conservatively, they have been taken out of the calculations).

A couple of points stand out:

  • Sales turnover from CO (adjusted for excise duty) have been decreasing over last 3 quarters; although they have grown/are steady yoy.
  • Margins in last 3 quarters have been a little erratic; but cumulatively for 9 months, margins are very good compared to earlier periods.

Views welcome. Have invested in this.

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That’s quite good. Seems he got 100% control plus will stay for a long time as well!

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Profile of the CEO is here: https://www.linkedin.com/in/tony-parmar-312b7611/

He is 52 years old and comes from a professional background.

Some speculation:
He got 25L salary for 2 months for Feb-Mar’17 (as per FY17 AR). It translates into appx. 1.4cr per year (except if there was some joining bonus or something). This is higher than even the CMD (promoter) who got 86L in full year fy17 (78L in fy16).

I am wondering why will the company hire such a high cost employee, if they dont want to focus on growth? And why will someone with so much professional experience join such a company if there were no potential?

His last job was President Jubilant Life. Where he was head of domestic formulation business which he launched in 6 months, (Albert david’s business is domestic formulations). He left that company in 3 years to join a till-now sleepy company.

He has closed loss making plant already. And was elevated to MD and CEO after a year of joining.

Another line of thought (since I am speculating anyways), is whether the family will hire high cost top guy in leadership role from market just to flog their existing assets. Maybe they are planning some expansion, maybe in the place of Mandideep facility.

Anyway, the AGM is on 3rd Sep and the FY18 AR will be out next month probably, which could provide some answers.

Discl - invested recently.

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https://www.bseindia.com/xml-data/corpfiling/AttachLive/d8671087-dc64-4c5e-9c46-ab510f45a8f2.pdf

Good results by Albert. Highest ever quarterly sales at 94cr (excluding other income, which is low in comparison to earlier quarters). Was surprised by increase in cost of employees. hopefully that should turn out to be a positive if they continue to generate higher sales from it. Need to understand what is this other expenses bucket which comprises 30% of sales.

Ebidta is 13.3% which is in line with the 3 quarter average (since the time they started reporting ex-mandideep. It was volatile at 15%, 8% and 18%, giving avg of 13.5%). Pat margin is 6.5% (again in line with last 3 Q average) after tax rate of 40% (which will see some moderation going forward).

TTM eps is 50.

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You are correct. The employee cost appears to very high even when we compare like Jenburkt, RPG Life and Unichem. Find enlcosed peer comparison for the company for your reference. While MR are critical points for the formulation company, the company need to improve productivity per Market represenative to improve operational performance. You may try to get Market representative strenght of company and calculate per MR sales to evaluare formualtors for better understanding of the company and its peer. I vaguely remember Torrent talking of achieving around Rs 10 Lakhs per MR Sales in Indian market. On Unichem, MR sales is around 6 Lakhs per annum as per enclosed article.


Peer comparison, one of the latest wonder of Screener
https://www.screener.in/company/compare/?codes=116,1608,3531,2790

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Thanks for the input Dhiraj. After closure of the Mandideep plant and giving VRS, I was expecting the employee cost to remain flat compared to earlier 3 quarters (in absolute number). However it has increased. As per the AR, the top management, especially the CEO, have got salary hikes compared to FY17. So this would have contributed to the higher salary. But, I also think that the company is investing in building its teams and probably hiring more number (and more experienced, maybe) of staff. As long as they bring in sales, the % would trend lower.

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Albert David FY18 Annual Report Notes
Company did not provide much information in the Annual Report. Only highlight seems to be the new CEO Mr. Tarminder Singh Parmar who is drawing more salary than the promoters of the company. Following are the highlights from the AR.

  • During the year under review, your Company achieved Net Sales of Rs.28710.87 Lacs and recorded a Gross Profit of Rs.2977.49 Lacs compared to previous year’s Net Sales of Rs. 30479.75 Lacs and Gross Profit of Rs.3475.20 Lacs from continuing operations. There was after tax loss from discontinued operations of Rs.364.14 Lacs and Rs.110.66 Lacs during the year 2017-18 and 2016-17, respectively.

  • During the year the Company had to shut down the operations of Mandideep Unit of the Company with effect from 1st January, 2018 as it had become commercially unviable.

  • Sales from Manufacturing = 78.16% and Trading = 21.84%.

  • Total Managerial Remuneration in FY18 was Rs. 2.36 cr. i.e. approx 23.98% of PAT. Out of Rs. 2.36 cr, CEO (Mr. T.S. Parmar) was paid Rs. 1.51 cr.

  • R&D exp is Rs. 2.70 cr. at 0.93% of sales.

  • Earning in foreign currency – Rs. 2573.51 Lacs (Previous Year Rs.2336.53 Lacs). Outgo in foreign currency – Rs. 2078.51 Lacs (Previous Year Rs.3783.79 Lacs).

  • At present, Company’s products are being exported to Latin American countries, South East Asia and few African countries. The business continues to grow and the potential to grow is enormous. We have initiated increased regulatory activities to register more products in existing markets. Eff orts are also on to collaborate with interested established partners to hasten our export business in South East Asia, CIS countries etc.

  • There are 1364 permanent employees on the rolls of the Company as on 31st March, 2018.

  • Streamlined the ‘exports’ operations and re-christened it as EMB (Emerging Markets Business) iv. Decided to focus on our core, profitable business – we thus took a strategic decision on our Mandideep operations and other unsustainable business operations.

  • Our work in establishing manufacturing of Miltefosine API and its drug product ‘Miltefosine Capsule’ at commercial level and for Regulatory submissions continues. Good work has been done to develop the Dossier document related information for drug substance like impurity profiling, degradation studies, stability studies etc. This is to maintain our leadership position in providing sustainable treatment option for leishmaniasis (PKDL, ML & CL) worldwide.

  • Mr. H P Kabra, Head Exports and Commercial, and Executive Director has retired in end March 2018, after an extended superannuation, after 44 years of long service at Albert David Limited. We appreciate his valuable services and contribution.

  • Mr. Tarminder Singh Parmar, CEO of Albert David Limited, has been inducted as a full time Director on the Board of the Company from 1st April 2018 and re-designated as Managing Director & CEO subject to your approval in the ensuing Annual General Meeting. Mr. Tarminder Singh Parmar joined the Company as CEO effective 24th January, 2017. Mr. Parmar is a dynamic pharma professional having over 30 years of experience with leading Indian and MNC companies. Mr. Parmar has a rare mix of exposure across the width of multiple corporate functions. Mr. Parmar is B.Sc. & MBA, and is fully conversant with the affairs of the Company. His qualification and experience qualifies him for the appointment as a Managing Director & CEO.

Regards
Harshit

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Just to add a few points - As per the AR, they generated CFO of 30cr. They reduced inventory by 7cr and receivables by 11cr. Whether they can sustain operations at this reduced working capital level remains to be seen.

About 16cr is stuck as investment in group cos. Against which they keep taking and repaying inter corporate loan, which as on BS date was about 12cr.

One good thing is they cancelled a corporate guarantee that they had given to a bank on behalf of some group co. It was 35cr worth. No financial impact, but indicates some sort of cleaning up.

After adding about 15cr of Plant and Machinery in 2017 (14% of the gross block), they sold 33cr worth of plant and machinery for 4.9cr and generated 3.3 cr gains, because written down value of those assets was 1.6cr.

Their RnD section has some noting on some new product. It reads:
(b) Specific areas in which R&D was carried out Our work in establishing manufacturing of Miltefosine API and its drug product ‘Miltefosine Capsule’ at commercial level and for Regulatory submissions continues. Good work has been done to develop the Dossier document related information for drug substance like impurity profi ling, degradation studies, stability studies etc. This is to maintain our leadership position in providing sustainable treatment option for leishmaniasis (PKDL, ML & CL) worldwide.

As per FY17 AR, this section read as follows:
(b) Specific areas in which R&D was carried out We have moved to establish the manufacturing of Miltefosine API and its formulation from lab scale to commercial plant level to maintain our leadership in providing sustainable treatment option for leishmaniasis (PKDL, ML & CL worldwide).

It indicates that some progress seems to have happened on this front. The impact of this development on the business is not known.

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I attended the AGM on 3rd Sep. Below are some notes (others who have attended, please feel free to add/amend as appropriate):

  • CEO TS Parmar (TSP) spoke of GST disruption caused in Q1-18 and impact on all companies. Doctors continued to prescribe medicines, chemists continued to sell. So secondary sales were not affected. However stocks were not replenished due to GST uncertainty, leading to loss of inventory of 20-40 days. They have 25 depots and 2000 stockists.
  • CEO mentioned that allopathic medicines cover 35% of the population and government’s new schemes of Jan Aushadhi and Ayushman Bharat would be targeted at the remaining 65% of the population, taking penetration to maybe 50%
  • Company has 4 main Therapeutic Areas (TAs) – Gynecology, Pain Management (Ortho related), Nutrition related and Gastro-intestinal.
  • They have now subscribed to two public Audits – a Sales Audit (AIOCD) and a Prescription Audit (SMSRC) which give periodic data about sales and prescriptions of various drugs. Company will use this data for their planning.
  • Both the Audits have confirmed that the molecules that the company is dealing in are progressive, and have good growth potential. However, the company’s brands are not as big as the potential. So, now the company’s efforts will be focused on pushing the brands it has.
  • Existing portfolio of molecules is enough. No new products are needed.
  • Company has about 30 brands, and top 5-6 contribute 50% of the sales.
  • Steps taken in the last year:
    o Closure of Mandideep plant – it was generating about 6cr of sales with about 2cr loss at operating level and 1.25cr loss before tax. Mandideep plant would have needed lot of investments to upgrade the machinery as there had been several technological advancements in those products, which the company had not kept pace with. They wanted to focus on pharma formulations. So it has sold off most of the machines. Land is leased and not much value is expected.
    o Rationalisation of workforce: Promoter Arun Kothari (AK) said that the company’s MRs are mostly unionized, which is the practice similar with other pharma companies. They have 470MRs located mostly in the North and East of India, with very less presence in the West and South. South India is the largest pharma market out of the 4 areas, and company has only 12% of its MRs in that region. The unionized MRs were not very focused, and not very productive and hence the employee cost as a % of sales is very high. In the last year, they have gradually changed the terms of understanding with these MRs and removed, restructured, reorganized this area. They have taken new MRs who are all non-unionised. These MRs have been divided into teams – based on the TA and on geography, and sale and marketing will now be in a more focused targeted manner.
    o Shutting down Institutional and Export sales – which contributed to about 4-5cr of sales. Exports will now be focused on non-US and non-EU areas and is reclassified into Emerging Markets Business division. They will now be focusing on increasing registrations of their products in Africa, Latin America, Asia etc.
    o Recruitment of highly qualified and successful people at senior positions
    o Setting up the Generic Generic Division – (I am not very clear about this, but what the company stated was that -) There is a parallel pharma market where medicines are sold in rural markets through traders. These are not through doctors’ prescriptions. There are no marketing / advertising activities. Sales are through trade channel push. They have tied up with one company for this. Currently this division contributes about 10cr of sales, and they expect this to contribute 25cr in FY19.
    o Contract Manufacturing – Company gets its products manufactured from 3rd parties on contract basis. This is classified under Traded Goods and currently contributes about 28% of sales, and will increase further.
    o IT integration for GST and Ind AS. ERP software has been set up. SOPs have been strengthened for consistency, continuity and larger involvement of teams.
  • Generally, 60% of sales happens in H1 and 40% in H2 of the year. CEO mentioned that this year all company’s performance, including Albert David’s must be compared on half-year basis and not quarterly, due to the GST impact.
  • Related party transactions – Loans to related parties and investments in related parties have been increasing. Arun Kothari mentioned that these are to Bharat Fritz Werner (a machine tools company, making sophisticated products) and Kothari Phytochem (making phyto chemicals). Both companies are doing well (no numbers were given) and are paying Albert David interest @ 11.25% which is more than the rate charged by lenders to ADL. However, he was requested to explore options to reduce these transactions, and while initially not quite receptive to this thought, he later agreed to see what could be done.
  • AK mentioned that ESOP program would be initiated once the company achieves a certain level of sales (no numbers were given)

My thoughts as below, (and I may be wrong on some of them because these are my personal inferences):

  • No capex or product development is needed for growth. Company needs to streamline its way of running its business, remove flab, bring in efficiencies related to plant operations (cost cutting), and employee orientation (form focused divisions, set targets, monitor achievements), use the Audits data to identify products that need to be focused on – basically concentrate on sales and marketing.
  • CEO did not give any guidance, even rough. He kept saying that the steps he and his team have taken will result in improvement which we will keep seeing in the numbers.
  • The CEO appeared to be well qualified and experienced to achieve the above and has already taken many steps in this direction. When I asked what attracted him to join ADL, he said he saw the same kind of turnaround potential in this company that he saw when he was brought in to set-up the formulations business of Jubilant Lifesciences and prior to that in integrating Zydus Biochem.
  • There were good vibes between AK and TSP indicating the promoter was giving the CEO a fairly free hand to run the business. ESOPs will help increase skin in the game. Till then he CEO will have to be satisfied with salary hikes and bonuses :slight_smile:
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Thanks @sammy11 for the AGM updates.

I went through the company AR and had a look at the company website to look at its products.

It seems that as the management maintains they have a full basket of products. What needs to be done is to market them efficiently and get better sales and profits out of same product basket.

I remember its product placentrex solution and gel which was launched many years ago and it used to be the only one company to launch the product. But of late its not available in Gujarat. Dont know the reason.

The best thing that seems to have happened to the company is induction of the new guy TS Parmar in place of a guy who was leading the co for 44 years. That could bring about some new vigour to the company. The new guy has been given a hefty salary of 1.5 crores plus which is a good sign.

They have gotten rid of loss making Mandideep facility which should help profitability going forward.

They have rid themselves of unionised MR force and inducted new MR who are not unionised. This again should help the company in its productivity.

As you mentioned shutting down their institutional sales should be a good sign as they can focus better on the more important business.

The first quarter results have been superb in terms of sales and profit growth. I would like to watch it for a couple of quarters more before deciding as the stock price has nearly doubled in a few months and might need cooling off.

The big question in my mind is the scalability of the business. Even with all these products for all these years while other companies have raced ahead, this company has remained in the same league it was in. Maybe the new CEO can create some magic. This however needs to be seen.

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Actually, this was in big league once upon a time. This was a large cap and part of sensex.
Today, it is a small cap.
Tomorrow, well let us see where Mr. Parmar takes it to!