Morepen Labs - a believable turnaround story

Stock Opportunities
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Morepen is up more than 10% today. The \court judgement quoted above though pours cold water over any expectations. Will bear watching.

Judgement though is of 2011. The Hon’ble Supreme Court had ordered that the trial should go ahead.
Any idea what happened?

I have come across judgements which emphasise his culpability, but nothing saying he was convicted.

Disclaimer: made some investment today.

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Morepen Labs

Technicals:-

  1. Chart indicating reverse head and shoulder and hence long term trend reversal
  2. Volume pick up around downward trend line break on the right shoulder
  3. RSI strong and comfortably above 30/40 WMA. Respecting 10 DMA uptrend with support close below

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Business fundamentals:-

  1. With the chemical prices coming down with China dumping, the entire API space is seeing margin expansion from raw material prices after a very tough 2022-23. Till Q4’23, margins were suppressed for these companies due to operating deleverage as there was a high amount of destocking all across
  2. Morepen delivered a great quarter, although on a subdued base with 32% topline and 73% EBITDA growth, on a subdued base. This was mainly contributed by strong growth in core API business and diagnostics business

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  1. Company has been delivering good growth YOY for a long time now. Despite a large COVID base, CAGR continues to be ~19% for the last 4 years.

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  1. The margins finally saw an uptick from Q1’24. This company has done 9-13% EBITDA margins pre COVID and even a move to the bottom of this range would be a big positive for earnings on the current base of 6% margins in 2023. Margins finally saw an uptick and conference calls from other companies (notably Divis) indicates better margins should be ahead with RM prices and high stock inventory being out of the system

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  1. Promoters infused capital in the company through warrants recently. This is almost a debt free company which has faced debt issues in the past due to being in CDR for a while. With this new capital, capacity addition is now happening, reflecting in the CWIP.
  2. They have an interesting consumer portfolio. Morepen as a brand is as it is well known in diagnostics, and new products in the consumer space look interesting

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  1. Valuations not too demanding due to last year margin erosion, still at 1.3x sales, far below its favourable cycle multiples and much below peers

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Risks:-

  1. Corp governance has had issues in the past - this is covered on the Morepen thread.
  2. They have seen debt/financial issues in the past and underwent corporate debt restructuring
  3. No concalls for the last 1 year, and hence not much details about growth drivers/margin scenario etc
  4. Thesis assumptions have been taken from industry trends in the absence of concalls

Disclosure : I am invested in self and family accounts with transactions in the last 30 days and hence am biased. I am still learning the industry and technicals so might be entirely wrong. I am not a SEBI registered advisor.

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Latest numbers show two years of negative cash flows from ops. 60 and 90 crores negative in march 22 and march 23 respectively. These are mostly on account of a spurt in receivables and inventory. Of-course these are expected to rise when sales go up. Now my problem is this - from march 2022 and march 2023 sales falls about 100 crores but receivables still keeps rising. If I am not selling the same amount should’nt my inventory and receivables get moderated? I’m seeing inventory has come down but receivables does the opposite. Why? Are they having some disputed collections issues? Can someone throw some light on this?
Thanks.

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Markets are very kind to Electronic Components with Inds P/E at 84x, here’s a API manf doing PCB assembly for glucometers (own brand) potential to expand into various other medical equips, currently at sub 30x P/E.
Apart from corporate governance issue in past, where am I reading this incorrectly, kindly guide.

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The market is giving it a low P/E just because of past goverance issues otherwise i don’t see anything else wrong.

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Other then the negative cash flow, everything about this company seems good. But I have issues with the leadership of Mr Sushil Puri, who was also at the helm when corporate governance issues happened. Here is a brief summary.

Here are the key events in Morepen Laboratories’ history, with dates and details on who was leading the company during these times:

1. Debt Crisis and Corporate Debt Restructuring (Early 2000s)

  • Date: The financial crisis began in the early 2000s, with the most significant issues arising around 2003-2004.
  • Leadership: The company was led by Sushil Suri, who was the Chairman and Managing Director at the time.
  • Details: Morepen Laboratories embarked on an aggressive expansion strategy that involved significant borrowing. However, the expected revenue growth did not materialize, leading to cash flow problems and an inability to service the debt. As a result, the company had to undergo a Corporate Debt Restructuring (CDR) process to manage its obligations, which damaged investor confidence.

2. Delayed Debt Repayments (2000s)

  • Date: The debt repayment issues continued throughout the mid-2000s, with significant concerns peaking around 2004-2005.
  • Leadership: Sushil Suri was still at the helm during this period.
  • Details: The company struggled to meet its debt repayment obligations, leading to further financial instability. This prolonged period of financial distress raised concerns about the company’s management and its ability to navigate the crisis.

3. Allegations of Financial Impropriety (Mid-2000s)

  • Date: These allegations surfaced in the mid-2000s, particularly around 2005-2006.
  • Leadership: Sushil Suri continued to lead Morepen Laboratories during this time.
  • Details: There were allegations of financial improprieties, including questionable accounting practices. These allegations led to doubts about the transparency and accuracy of the company’s financial statements. This period was marked by significant challenges in restoring investor trust.

4. SEBI Action for Compliance Issues (2017)

  • Date: In 2017, the Securities and Exchange Board of India (SEBI) took action against Morepen Laboratories.
  • Leadership: Sushil Suri was still the Chairman and Managing Director.
  • Details: SEBI imposed penalties on Morepen Laboratories for delays in the disclosure of financial results and other compliance-related issues. This regulatory action highlighted ongoing concerns about the company’s adherence to regulatory standards and corporate governance.

5. Improvement in Financial Position and Strategic Shifts (2018-Present)

  • Date: From around 2018 onwards, Morepen Laboratories has made efforts to improve its financial health and corporate governance.
  • Leadership: Sushil Suri continues to lead the company as Chairman and Managing Director.
  • Details: The company has focused on expanding its product offerings, particularly in the medical devices and API segments. Morepen has also improved its financial discipline, evidenced by successful fundraising efforts like the recent QIP in 2024. These efforts indicate a positive shift in strategy, though the shadow of past issues remains in investor memory.

and more
https://www.quora.com/What-is-the-MGM-Morepen-scam-in-Delhi

and more

and more
Morepen Laboratories Ltd, a Delhi-based pharmaceutical company, has faced several allegations of fraud, including:

  • 2004 CBI chargesheet

In 2011, the company’s chairman and managing director, Sushil Suri, faced trial for forgery and cheating. The CBI alleged that the company took a bank loan to buy machinery, but then diverted the money, used existing machinery as new, and claimed depreciation benefits from the income tax department.

  • 2019 SEBI order

The Securities and Exchange Board of India (SEBI) barred Morepen from the capital market for a year for making misleading disclosures about global depository receipts (GDRs). The order stated that Morepen pledged the GDR proceeds to loans taken out by subscribers, and that the company violated the Prohibition of Fraudulent and Unfair Trade Practices (PFTUP) norms. The Supreme Court later admitted SEBI’s appeal against the Securities Appellate Tribunal’s (SAT) order, which had issued the one-year ban.

Sushil Suri was involved in all these events. Once a fraud, always a fraud. Also, they diluted significant amount of equity this time which I am not okay with.

Summary

Morepen Laboratories, under the leadership of Sushil Suri, faced significant financial and governance challenges in the early to mid-2000s, which had long-lasting effects on its reputation. Despite these setbacks, the company has shown signs of recovery and strategic growth in recent years, though it is still working to rebuild investor trust.

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Sharing below view of Sajal Kapoor on Morepen Labs

Please watch from 39 minutes on the timeline.

I hope it helps.

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I don’t get this. If a business is growing at 20-25%, why hive into a seperate unlisted entity without giving details of a proper structure ? Isn’t it unfair to its shareholders?
Am I missing something ?

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If it will remain a fully owned subsidiary of Morepen, then it should not affect consolidated right? Seems like they are opening a subsidiary for this business?

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Even if this gets hived off, generally shares of new company will be given to existing shareholders. Share swap will be function of valuation of both entities

While not clear in this, reason for such hive off is that to have more focus and raising capital (there may be set of investors who may be keen for medical equipments business but not in pharma or other way round)

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Detailed Analysis of Morepen Laboratories Limited’s Q2 FY25 Earnings Call

Growth Parameters

  1. Revenue Growth:

    • Q2 FY25 Revenue: ₹444.71 crore, representing a modest 4% YoY growth.
    • H1 FY25 Revenue: ₹901 crore, up from ₹828 crore in H1 FY24.

  2. Profit Growth:

    • Q2 FY25 PAT: ₹35 crore, up 64% YoY.
    • H1 FY25 PAT: ₹71 crore, a substantial increase of 59% YoY.

  3. EBITDA Growth:

    • Q2 FY25 EBITDA: ₹49 crore, marking a 33% YoY increase.
    • TTM EBITDA: ₹211 crore, achieving consistent growth.

  4. Export Growth:

    • Exports increased by 20% in H1 FY25, with significant growth in Europe (60% YoY).

Future Outlook

  1. Revenue Target:

    • The company aims for a 20% CAGR to achieve ₹5,000 crore in revenue by 2030.

  2. Strategic Shifts:

    • Expansion into high-margin, consumer-facing businesses such as medical devices and branded formulations.
    • Plans to increase medical representatives from 200 to 1,000 over five years.

  3. Capacity Expansion:

    • Major capacity expansions in medical devices and API production blocks (P8, P9, P10).

Industry Outlook

  1. API Business:

    • Focus on high-value drugs and export markets due to better profitability compared to low-margin domestic sales.
    • New products targeting diabetes and cholesterol management are gaining traction.

  2. Medical Devices:

    • Increasing adoption of glucometers and BP monitors, with plans to launch Bluetooth-enabled meters and apps for better consumer engagement.
    • Medical devices are projected to grow at 25%-30% CAGR.

  3. Regulatory Approvals:

    • Recent USFDA and Health Canada approvals for certain devices open up opportunities in regulated markets.

Capex

  1. QIP Utilization:

    • ₹200 crore raised, with ₹123 crore allocated for capex.
    • Progress in machinery orders and civil works for medical devices and API facilities.

  2. API Expansion:

    • Capacity increase from 400 KL to 600 KL, with a 15% production growth in the last quarter.

  3. Medical Devices:

    • A new facility five times larger than the existing one, nearing completion.

Dividends

  • No mention of dividends for this quarter.

Margin Guidance

  • Current EBITDA margins are at 11.55% for H1 FY25, with a long-term target of 15%-18% by FY30.

Business Segment Performance

  1. API Segment:

    • Decreased domestic sales due to a focus on profitability rather than volume.
    • Key API products (Loratadine, Montelukast) maintain leadership with market shares of up to 70%.

  2. Medical Devices:

    • Contributed ₹271 crore to H1 FY25 revenue (~30% of total).
    • Sales of strips per glucometer are increasing, boosting profitability.

  3. Branded Formulations:

    • Expanding domestic network for products like Burnol and Lemonate.
    • New weight-loss product launch planned around the New Year.

Growth Triggers

  1. Consumer-Facing Business:
    • Strong push towards branded formulations and medical devices with recurring revenue potential.
  2. Export Expansion:
    • Increased registrations in regulated markets like the US and Canada.
  3. Backward Integration:
    • Reduced dependence on imports for components of BP monitors and strips, improving margins.

Downsides

  1. Sluggish Domestic API Sales:
    • Decline in low-margin markets like India and South America.
  2. Capacity Constraints:
    • Temporary production issues impacted growth in BP monitors and strips.

Upsides

  1. Global Market Penetration:
    • Entering regulated markets for medical devices opens significant opportunities.
  2. New Product Pipeline:
    • API portfolio includes promising drugs for diabetes, cholesterol, and fatty liver.

Future Growth Guidance

  • Expected revenue growth of 20% CAGR until 2030, with PAT margin targets of 10%.
  • Medical devices projected to constitute 40% of total revenue by 2030.

Points of Significance

  1. Market Leadership:
    • Dominance in several API categories with continued market share growth.
  2. Technological Advancements:
    • Development of Bluetooth-enabled glucometers and supporting apps.
  3. Strategic Focus:
    • Prioritization of profitability over revenue growth ensures sustainable margins.

Morepen Laboratories is on a transformative path, focusing on high-margin businesses and global market penetration while balancing profitability with strategic growth.

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Morepen Lab did the Q3FY25 results concall on 6th Feb didn’t mention anything about hiving off the medical devices business and later on 7th they did an EGM to hive off the medical devices business, that business is still growing compared to the pharma business. https://www.bseindia.com/xml-data/corpfiling/AttachLive/8440a365-5446-4205-86f3-b11a79e4ddbb.pdf don’t think it is a positive development for minority
share holders, was holding some shares but sold few days back. Any thoughts ?

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While the IHI ETF also includes high risk device makers, this is interesting to note.

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Hi All,
This is my first query on the platform. Need a help with regards to the cash flow, have seen the recievables and inventory as negative due to which cash flow from operations looks negative.
From my understanding this means they sell before they manufacture which looks positive is my understanding corrects.
Thanks for anyone’s help with regards to this.
Disc- am currently invested