Lincoln Pharma ... the next mid-cap pharma in the making ...?

Stock Opportunities Untested - but worth a good look
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Lincoln Pharmaceuticals Limited is an India-based holding company, which is engaged in the business of manufacturing, marketing and distribution of pharmaceutical products. The Company offers tablets, capsules, liquid injection, cream in tubes and dry power injection, among others. Its portfolio of products by segment name includes Aldase, Alphaline, Anzyme, Azilin, Ceftalin, Cepy, Dermolin, Pentalink, Progut, Protosol, Robilink, Soludine, Trixon and Vivian. The Company’s plant is located at Trimul Estate, Khatraj, Tal Kalol, Gandhinagar, Gujarat. The Company has two subsidiaries, including Zullinc Healthcare Limited and Lincoln Parenteral Limited, which are engaged in the business of pharmaceutical products. The Company has presence in Bhutan, Bolivia, Botswana, Cameroon, Chile, Cambodia, Congo, Costa Rica, Ethiopia, Ghana, Hong Kong, Jamaica, Kenya, Malawi, Myanmar, Nepal, Nigeria, Panama, Peru, Philippines, Senegal, Sri Lanka, Thailand, Uganda, Vietnam and Zimbabwe

Last 10 years performance:

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From Annual Report,
Industry Structure and Developments:
The Company is primarily engaged in the business of manufacturing, marketing and Exports of Pharmaceutical products. In India Pharmaceutical Industry’s continuously showing the growth rate of 20% to 22% as a industry as a whole. Looking to the Indian population, there are lot of opportunities for fast development of industries in the upcoming year also. In regulatory market the opportunities are quite open in generic products in the developing countries and lease developed country. There is lots of awareness in the R&D centres in the country’s and many new molecules as well as process are developed in the countries. Inspite of the stiff competition in the country and parallel marketing of generic products, growth of sales and turn over is assured. The financial year 2014 - 2015 has remained very excellent in terms of sales and growth of the company.

Opportunities:
There are number of opportunities available before the company in terms of products as well as sales territories in India where the growth rates are very potential. The Company is focusing on the brand image of the product as well as corporate branding in the markets. There are numbers of Pharma segments available before the company, for chronic medicines as well as non covered segments as present before the company. The company has wide opportunities for trading of products for developed countries and lease developed countires, business association in the field of manufacturing as well as marketing. The company is focusing on the new market area and other many countries by way of restructuring in the existing organization. The future of the Company and its products seems to be excellent in the coming year.

Outlook:
Company expects to increase the market shares in the exiting markets. The company expects to increase volume in the product portfolio. The company is also expects to introduce new products launched by the efforts of R&D centre. The company is expanding its marketing structure covering all geographical area. The company is focusing on the various divisions like Pharma, Teresa and Lord’s for the category of the product segment and concentrating on focused marketing by dedicated marketing teams. The Company continues to work on innovative strategies to broaden access to its medicines and strives to identify new growth opportunities to deliver strong performance.

Any views ?

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I have analysed but if you analyse the economic value addition is not there
EVA = Value of asset *(ROEC %- Cost of capital)
ROEC being < cost of capital it will be negative . Cost of capital is around 12 %
Please check and confirm
Regards
P K Joshi

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q2 results out. Its a mixed bag.

Topline grows from 75 crores in q2 fy 15 to 91 cr in q2 fy 16. which is quite encouraging.

Net profit flat at 6.61 crores. Main culprit here is increased employee expenses which increases from 4.3 to 7.3 crores.

Half yearly eps at 8 per share. Last year co did eps of 9 per share for full year.

If co can continue growth momentum in last two quarters this could become interesting.

disc: invested from lower levels. It was a techno funda bet for me.

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Agree. Margin contraction was lil disappointing. Looking At the balance sheet, fixed asset number has gone up significantly reflecting in the turnover.

I think they should be able to maintain the top line momentum. Real challenge would be lifting margins to previous levels.

Disc: holding from lower levels

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Your assumption on stake in Lincoln Parenteral Ltd is wrong… It has increased its stake in the entity to 98.58%…

http://corporates.bseindia.com/xml-data/corpfiling/AttachHis/FBB4505A_3887_4389_B7E8_8F7CAC0386BD_083811.pdf

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I am just pointing out to the data that you have posted… Don’t take it offensive… When we are putting data in public domain, we have to be careful… That’s it… No comments on the stock or its performance or your comments… Hope you understand…

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If you know you have erred, please rectify the error and oblidge.

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We can not allow the erred post to remain as it is. Please re-post the same with correction if you want.

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How would you value lincoln pharma? Is 15 a fair pe for the company given that it should show decent topline growth. One issue is the cash conversion cycle of almost 170 days but that should get corrected hopefully.

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Cash conversion cycle 170 days ? Could you please provide some link to justify it. Because in the AR 2014-15 I didn’t find any mention on it.

Most of the Pharma companies out there in the market are quoting a P/E of > 30. My understanding is that the main reason for it to trade at lesser P/E is the promoter’s holding which is around 36%. But if you breakdown the SHP from AR, 33% of shares are held by someone who is close to the promoters i.e. relatives/friends. So, there won’t be any issues with respect to the decision making. In my view, accounting the above point this stock should be valued at 30 P/E at least.

Also, if we look at the last 10 years 17% sales growth & 22% profit growth is decent enough. Year 2015-16 seems to be a inflection point where the company is clocking 90Cr sales. If we be conservative of 6Cr profit, EPS would be around 15. Another good part is that the company is spending money is expanding it’s sales network which is why employee cost increased, I presume. They are mainly targeting the countries in South America, Africa and Asia. Their injectible plant is ready and they are in the process of applying for USFDA. Getting into the regulated market would be another major plus which would help in better margin.

For their product details and other aspects follow below presentation,
http://www.lincolnpharma.com/wp-content/uploads/2014/11/2015-16-Q2-Business-Presentation.pdf

Going forward I see a great value creation in this security in long term.

PS: Invested at lower levels. My views may be biased.

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Just a FYI.
Motilal Oswal recommended Lincoln Pharma as a potentional multibagger.

Pretty much no fund house spoke of this stock till.

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Post this interview, I was doing my own research on Lincoln Pharma. To my eyes, there were a few red flags.

One was the approval of upto Rs 50 cr in related party transactions to subsidiary and related party transactions. Why does a company need this? Is it to siphon off certain jobs and revenues to subsidiaries - potentially to create 100% owned dividend paying subsidiaries? Also the PAT margin on the subsidiary is < 1% - seems like either non-value add work is being farmed to the subsidiary or LP is not doing arms length transactions with the subsidiary. Seemed a little surprising. The company does not need give any explanation of the raison-de-etre of this subsidiary.

Also was the appointment of family members as “independent directors” - hardly small-investor friendly.

Also their past auditor “resigned” - not sure why would a service provider resign.

While the stock will no doubt zoom in the next few weeks, these issues prevented me from buying - in wait and watch mode.

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On Subsidiary related transactions - Lincoln Pharma bought 100% stake in Lincoln Parenteral, which is into injectible business & they have come up with a injectible plant recently. They spent nearly 30Cr for injectible plant.

Anyhow, do you research before taking any decision

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Was looking at the cash flow for Lincoln Pharma for 2015 -There is a 25 Cr decrease in borrowings shown in the cash flow from financing. The balance sheet does not show this reduction ( borrowings have actually increased). There is a 30 Cr increase in receivables which does not seem to reflect in the 7.6 Cr shown as decrease in current assets. Any explanations on how to read this ?

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To be very honest, I never look into the micro details in the balance sheet. The reason is very simple - most of the good companies that became mega companies had some sort of the negatives in the accounting at the initial state. On other hand the companies that had everything accounted and a very good fundamentals are already way too expensive and money can’t be made there. We can’t call it a fraud. But the accounting could be improved in such cases.

If we are going by the balance sheet then what about “other expenses which is exorbitantly high”. This is my view.

Having said above, I look into the balance sheet & financial statements but only up to some extent, provided company passes scuttlebutt analysis, good fundamentals and ethical promoter AND available at cheap evaluations.

PS: invested at very low price.

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@Praveen, Congo for the early discovery and hard work you have done to keep this thread up-to-date.

However, I really believe we should do some more in depth analysis as the thread lags the depth which is there in other threads viz Granules/Suven/Torrent Pharma etc.

I must say that I have become interested in this co, post MOSL list of mid to mega caps and started digging deeper so as to find out:
Which are the major therapeutic areas the company present in and what’s the revenue contribution?
What is the percentage of exports to total sales?
Does the company manufactures any APIs/FDs? Any mfg contracts/tie-ups which will show earnings visibility?
What is the revenue break up from APIs to branded/unbranded generics?
Does any of its brands feature in top 20/50 list?
Most IMP : What are the key triggers so that it will become a mega cap tomorrow?

Got some answers from the company presentation below, but not all:


Need to work more on this.

The market knows something we do not know. Else, why would a small company deserve close to 30 PE?

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Hello Advait,

Thanks a lot. What I meant to tell from the earlier thread is that I don’t much rely on the micro stuff in the balance sheet. For e.g. the balance sheet has increasing receivables but not decreased in the current level. With the limited time available I am unable to do it between my work. But, I will start looking into it when I find time.

But the above questions which you raised are the part of Scuttlebutt method which one has do anyways. I have already posted the investor’s presentation a week back that answered most of the questions like Top brands, Therapeutic segments, Countries at which products are sold, Patent information, Regulatory status and walking into the medical to know the product’s popularity & fundamentals from Screener.

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is it an investment grade company ?

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Does Lincoln Pharma have a USFDA approved plant or has it got approval recently for its plant?

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No its not USFDA approved as it isn’t aiming US markets just yet

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