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Analysis of Marksans Pharma Ltd : Stock Analysis December 2023

Disclaimer:
The analysis and opinions provided above are for educational and informational purposes only. They should not be construed as specific investment, accounting, legal or tax advice. Individual situations and current events may differ from case to case basis, so readers and viewers are advised to consider analysis that aligns with their portfolio risk, investment goals and unique situation before making any investment or financial decision.


Company Introduction and Profile

Marksans Pharma Ltd is a notable player in the pharmaceutical industry, focusing on the formulation of pharmaceutical products. With a market capitalization of ₹7,303 Cr and a current stock price of ₹161, the company has shown resilience and growth potential in a competitive sector. In FY22, its revenue mix was diversified across various therapeutic segments, with a significant portion coming from Pain Management (51%) and Cough & Cold (11%). This diversification reflects its strategic positioning in high-demand healthcare segments.

Financially, Marksans Pharma presents a robust picture. It reported a sales growth of 15.2% over 5 years and a profit after tax of ₹296 Cr. The company’s OPM (Operating Profit Margin) stands at a healthy 20.1%, indicating efficient operational management. A high OPM coupled with a low debt-to-equity ratio of 0.06 showcases the company’s strong financial standing and low reliance on debt financing.

Additionally, the promoter holding has remained consistent, currently at 43.8%, which signals strong leadership confidence in the company’s future. The EPS (Earnings Per Share) is ₹6.74, reflecting good profitability per share. Notably, the company has no pledged percentage, adding to investor confidence.

Marksans Pharma is a fast growing pharmaceutical company engaged in manufacturing and marketing generic formulations across therapeutic areas like pain management, oncology, diabetes, cardiovascular diseases etc. The company has delivered a strong compounded annual growth rate (CAGR) of 16% in revenues and 19% in profits over the last 10 years.

Around 51% of Marksans’ revenues come from pain management drugs. The company focuses more on over-the-counter (OTC) drugs which account for 69% of revenues currently. The promoter, Mark Saldanha owns 43.8% stake in the company. Marksans Pharma has a healthy balance sheet with debt to equity ratio of just 0.06 and cash & cash equivalents of ₹661 crores as of Sep’23.

Analysis of Marksans Pharma Ltd : Stock Analysis December 2023

Should We Buy, Sell, or Hold This Stock and Why?

Given the financial data and company performance, Marksans Pharma appears to be a solid investment choice for several reasons. First, its low debt-to-equity ratio (0.06) and the consistent or increased promoter holding indicate a stable financial structure and management confidence. The lack of pledged shares further strengthens this view.

The company’s high OPM (20.1%) suggests effective operational management, crucial in the pharmaceutical industry. The EPS of ₹6.74 is impressive, signifying strong profitability. Additionally, the difference between the stock’s current market price (CMP) of ₹161 and its book value of ₹41.4 is reasonable, suggesting the stock is not overly priced.

However, a note of caution is warranted due to the slight decrease in promoter holding over the last three years (-4.40%). While not drastic, it’s essential to monitor this trend for any signs of diminishing confidence from the promoters.

Marksans Pharma looks like a good stock to buy and hold for the long term based on the following positive parameters:

  1. Robust growth: Marksans has delivered strong sales and profit growth of over 15% and 50% CAGR respectively over last 5 years. This growth momentum is expected to continue going forward.
  2. Improving margins: The company has seen consistent expansion in operating margins from 13% in FY19 to 20% in FY22 on the back of rising contribution from high margin OTC drugs. This will lead to further margin expansion.
  3. Strong financials: Marksans has a rock solid balance sheet with high cash balance and negligible debt. The company is almost debt free with debt to equity ratio of just 0.06. This provides good growth capital for expansion.
  4. Attractive valuations: Despite the recent run-up, the stock trades at a reasonable P/E of 24.6 which is below the industry average of 31.9. The difference between CMP and book value is also not very high.

Overall, Marksans Pharma is a good turnaround story in the pharma sector and investors can BUY and hold this stock from a 2-3 years perspective.

Vital Company Ratios for a Layman

For a layman, understanding key financial ratios of Marksans Pharma is crucial in making an informed investment decision. The Debt to Equity ratio, at a low 0.06, indicates that the company is not heavily reliant on debt to finance its operations, a positive sign for financial stability.

The OPM of 20.1% is a critical measure of the company’s operational efficiency, illustrating that it effectively converts its revenue into profit. The EPS of ₹6.74 shows the company’s profitability on a per-share basis, which is a direct indicator of its earning power.

Additionally, the P/E (Price to Earnings) ratio of 24.6, though slightly lower than the industry average of 31.9, is within a reasonable range, suggesting that the stock is not undervalued or overvalued. A high dividend yield of 0.31% may not be very attractive for income-seeking investors, but it indicates the company’s ability to generate and distribute earnings.

Given these financial metrics and the company’s overall performance, Marksans Pharma presents itself as a potentially good investment. The recommendation, based on the current analysis, would be to ‘Buy’ with a watchful eye on the slight decrease in promoter holding. The company’s strong operational metrics, coupled with a stable financial structure, make it an attractive choice for investors seeking long-term growth in the pharmaceutical sector.

Here are some of the vital ratios of Marksans Pharma explained for a layman investor:

  1. Sales Growth (5 year CAGR 15%): This indicates how fast the company has grown its overall revenues in the last 5 years. A 15% CAGR is healthy growth.
  2. Profit Growth (5 year CAGR 52%): Much faster growth in profits compared to sales, showing rising efficiency of operations.
  3. Return on Equity (ROE) – 19%: For every 100 rupees of shareholders’ equity, Marksans made an annual return of 19 rupees over the past year. Higher the better.
  4. Price to Earnings (P/E) ratio: 24.6 – This shows how many years it will take for earnings to cover the stock price. As a fast growing company, higher P/E is justified.
  5. Debt to Equity: 0.06 – For every 1 rupee of shareholders’ equity, Marksans has only 6 paisa of debt. Very strong balance sheet.
  6. Operating Profit Margin (OPM): 20% – For every 100 rupees of sales, the company made ₹20 operating profit, which is a healthy ratio. Rising margins show higher efficiency.
  7. Free Cash Flow (5 Years): ₹558 crores – Strong growth in operating cash flows minus capital expenses. It represents cash available for dividends, buybacks etc

Promoter Holding:

  • FII/DII Holding: FII holding increased from 5.05% to 15.11% during same period
  • Sales: Grown at 15-20% CAGR over last 5 years
  • Profits: Grown faster at 50%+ CAGR over last 5 years
  • Debt: Declined from Rs 111 cr in FY21 to Rs 111 cr in Sep’22
  • Margins: Improved from 13% in FY19 to 20% in Sep’22
  • Market Cap: Rs 7,303 cr, lower than peers like Torrent Pharma, Gland Pharma etc
  • Industry PE: 31.9x vs Marksans’ PE of 24.6x
  • Intrinsic Value: Rs 119 vs CMP of Rs 161 (35% upside)
  • Cash: Very high at Rs 661 cr as of Sep’22
  • Dividend: Only 0.31% indicating focus on growth currently

Competitor Analysis

Marksans Pharma operates in the competitive pharmaceuticals industry, with several key players as its competitors. From the data provided, competitors include Torrent Pharma, Gland Pharma, Ajanta Pharma, Laurus Labs, ERIS Lifescience, and Caplin Point Lab.

Performance Comparison:

  • Market Cap: Marksans Pharma, with a market cap of ₹7,303 Cr, is relatively smaller compared to Torrent Pharma (₹69,498.08 Cr) and Gland Pharma (₹29,279.69 Cr). This difference in market cap may reflect the broader market presence and scale of operations of these competitors.
  • Company PE vs. Industry PE: Marksans Pharma’s PE ratio of 24.6 is lower than the industry average of 31.9. This could indicate that it’s undervalued compared to its peers, or it may reflect market perceptions of its growth prospects compared to others like Torrent Pharma (PE 51.75) and Gland Pharma (PE 37.23).
  • Sales and Profit Trends: Marksans Pharma has shown consistent growth in sales and profits, which is a positive sign. However, its scale of revenue and profit is smaller compared to larger players like Torrent Pharma and Gland Pharma. For instance, Torrent Pharma reported NP Qtr Rs.Cr of 386.00, significantly higher than Marksans Pharma’s.
  • Debt Trend: Marksans Pharma’s low debt trend (Debt to Equity 0.06) is a positive aspect, especially when compared to larger peers who might have higher debt levels, like Torrent Pharma with a Debt to Equity of 0.67.
  • Cash in Hand: Marksans Pharma’s cash reserves of ₹661 Cr are substantial, which is a strong point for the company, providing financial flexibility.

Overall, while Marksans Pharma may not match the scale of its larger competitors, it shows robust financial health, with low debt levels and increasing sales and profits. Its lower PE ratio compared to the industry average might make it an attractive investment for those looking for potential growth at a relatively lower valuation. The consistent promoter holding and increasing sales and profit trends bode well for the company’s future prospects. However, investors should also consider industry trends and broader market conditions in their analysis.

Key competitors include Torrent Pharma, Gland Pharma, Ajanta Pharma with market cap in the range of Rs 20,000-70,000 cr range. Marksans revenue growth is in line with these peers at 15-20% CAGR. However, margins are on the lower side. Profit growth has outpaced most competitors in recent years. Overall competitiveness is moderate currently but new launches and rising exports hold good growth potential for Marksans vs peers.

Is Marksans Pharma Stock Overvalued or Undervalued?

To determine if Marksans Pharma’s stock is overvalued or undervalued, we need to consider several financial metrics and compare them with industry standards:

  1. Price-to-Earnings (P/E) Ratio: Marksans Pharma has a P/E ratio of 24.6, lower than the industry average of 31.9. This suggests that compared to other companies in the pharmaceutical industry, Marksans Pharma’s stock may be undervalued. A lower P/E ratio indicates that the stock is priced lower relative to its earnings, which could be a sign of undervaluation.
  2. Debt-to-Equity Ratio: With a debt-to-equity ratio of 0.06, Marksans Pharma shows strong financial stability. This low ratio is a positive indicator, as it means the company is not heavily reliant on debt to finance its operations.
  3. Operating Profit Margin (OPM): The company has a healthy OPM of around 20.1%, reflecting efficient operational management. A strong OPM often correlates with a company’s ability to generate profit and maintain cost efficiency, which is a positive sign for investors.
  4. Intrinsic Value vs. Market Price: The intrinsic value of Marksans Pharma’s stock is ₹119, while the current market price (CMP) is ₹161. This gap indicates that the stock is trading at a premium compared to its calculated intrinsic value, which could suggest overvaluation. However, intrinsic value calculations can vary based on different assumptions and models.
  5. Sales and Profit Trends: The company has shown consistent growth in sales and profits, indicating strong business performance, which should ideally be reflected in the stock price.

Considering these factors, it seems that Marksans Pharma’s stock might be slightly overvalued when looking strictly at the intrinsic value. However, the low P/E ratio and strong financial health might make it an undervalued stock in the eyes of some investors, especially when compared to industry averages.

At current price of Rs 161, Marksans Pharma is trading at a P/E ratio of 24.6x which is below the industry average of 31.9x. Typically high growth companies trade at premium valuations. Moreover, the company’s intrinsic value is estimated at Rs 119 which is 26% below its current market price. This indicates that the stock appears overvalued based on fundamentals.

However, in the last 5 years, Marksans has delivered robust revenue and profit CAGR of 15% and 52% respectively as against industry growth of 12-15%. Given its strong growth track record and healthy balance sheet, some premium is justified. Overall the stock appears fairly valued considering future growth potential.

Should We Buy This Stock and Why?

Investing in Marksans Pharma’s stock could be considered for the following reasons:

  1. Financial Health: The company’s low debt-to-equity ratio and substantial cash reserves (₹661 Cr) indicate strong financial health. This financial stability is crucial, especially in the volatile pharmaceutical industry.
  2. Growth Potential: Marksans Pharma has demonstrated consistent growth in sales and profits. This trend is a positive sign for potential future growth and profitability.
  3. Valuation: While the stock seems overvalued based on its intrinsic value, its lower P/E ratio compared to the industry suggests it might be undervalued from a market perspective. This dichotomy might present an opportunity for investors looking for stocks with growth potential that are not overly expensive relative to their earnings.
  4. Operational Efficiency: The company’s healthy OPM indicates efficient management and the ability to convert revenues into profits effectively.

However, there are also cautionary factors to consider, such as the slight decrease in promoter holding and the gap between its intrinsic value and market price. Investors should balance these aspects with the company’s overall financial stability and growth prospects.

Marksans Pharma is a good stock to consider buy for long term investors despite some overvaluation:

  1. Robust Growth – With a solid track record of 15%/50% sales and profit CAGR over 5 years which is expected to continue
  2. Strong Brands – Well established brands with leadership in key therapies like pain management and oncology
  3. Financial Health – Debt free and cash rich balance sheet provides funds for expansion
  4. Operating Leverage – Increasing proportion of high margin OTC drugs will lead to margin expansion from 20% currently
  5. Export Focus – Tapping regulated markets like US, Europe etc holds huge growth potential
  6. Valuations – Stock has corrected recently making risk-reward favorable for long term investors

Overall, Marksans has a strong portfolio of brands, growing exports, niche product segments and robust growth prospects. The company is at an inflection point with expanding margins and healthy balance sheet. These strengths outweigh risks of high valuations making Marksans Pharma a good BUY consideration.

How Is the Industry of This Company Growing?

The pharmaceutical industry, particularly in India, has been experiencing significant growth, driven by various factors:

  1. Global Demand: There’s a rising demand for pharmaceutical products globally, especially in the wake of health crises like the COVID-19 pandemic. Indian pharmaceutical companies, known for their generic drug production, are well-positioned to cater to this demand.
  2. Government Initiatives: The Indian government has implemented various initiatives to support the pharmaceutical industry, such as the ‘Pharma Vision 2020’, aimed at making India a global leader in end-to-end drug manufacture.
  3. Research and Development (R&D): There’s an increasing focus on R&D in the industry, with companies investing in developing new drugs and formulations. This focus is essential for long-term growth and competitiveness.
  4. Export Market: Indian pharmaceutical companies have a significant presence in the global export market, especially in generics and vaccines, contributing substantially to industry growth.
  5. Healthcare Spending: With rising healthcare awareness and spending, both in India and globally, the demand for pharmaceutical products is likely to continue growing.

Considering these factors, the pharmaceutical industry presents a promising growth outlook. Companies like Marksans Pharma, which have shown strong operational and financial performance, are likely to benefit from these industry trends. However, investors must also be aware of the challenges in the sector, including regulatory changes, competition, and the need for continuous innovation.

The Indian pharmaceutical market is expected to grow at a CAGR of 10-12% over the next 5 years to reach size of $65-68 billion by 2025, according to various reports. Key growth factors include:

  1. Increasing per capita income and healthcare spending
  2. Rising lifestyle diseases and chronic disorders
  3. Improving insurance coverage and access to medicines
  4. Patent expiry of major drugs leading to market expansion
  5. Export potential to regulated markets on back of India’s strong manufacturing base
  6. Supportive government policies like PLI scheme, cluster development program etc

Marksans Pharma is well positioned to benefit from this high industry growth trend on back of its strong domestic distribution reach, planned investments in R&D and exports along with new product launches. The company can potentially grow faster than 12-15% industry growth rate over next 3-5 years.

Long-Term Performance of Marksans Pharma

When assessing the long-term performance potential of Marksans Pharma, several factors and trends should be considered:

  1. Industry Growth Trends: The pharmaceutical industry is expected to grow steadily, driven by increasing global healthcare demand, innovation, and an aging population. Marksans Pharma, with its diversified product portfolio in areas like Oncology, Gastroenterology, and Pain Management, is well-positioned to capitalize on these trends.
  2. Research and Development (R&D): Continuous investment in R&D is crucial for long-term success in the pharmaceutical industry. Marksans Pharma’s focus on both over-the-counter (OTC) and prescription drugs, and its potential for innovation in various therapeutic areas, could be a significant driver for sustained growth.
  3. Financial Stability: Marksans Pharma’s strong financial metrics, such as a low debt-to-equity ratio (0.06) and substantial cash reserves (₹661 Cr), provide a solid foundation for long-term growth. This financial stability allows the company to invest in growth opportunities, manage operational costs effectively, and navigate market uncertainties.
  4. Market Expansion and Diversification: The company’s ability to expand into new markets and diversify its product range will be critical for long-term performance. As healthcare needs evolve globally, companies that adapt and offer relevant products will likely see sustained growth.
  5. Regulatory Environment: The pharmaceutical industry is highly regulated. The company’s ability to comply with changing regulations and quality standards, especially in different international markets, will be crucial for long-term success.

Given these factors, Marksans Pharma appears to be well-equipped for long-term growth, provided it continues to innovate, maintain financial discipline, and adapt to market and regulatory changes.

Marksans Pharma is expected to deliver strong performance over the long term of 5-10 years on the back of following growth drivers:

  1. New Product Launches: Marksans plans to launch 20+ new products every year in domestic and international markets which will aid consistent 15-20% revenue growth
  2. Increasing Exports: The company aims to expand exports contribution from 22% currently to over 50% by 2025. Tapping regulated markets offers huge growth potential.
  3. Margin Expansion: Rising share of OTC drugs which have gross margins of over 60% compared to just 15% for prescription drugs, will lead to steady increase in profit margins from 20% now.
  4. Financial Strength: The debt free and cash surplus balance sheet provides enough capital for funding expansion plans without any dilution risk.
  5. Attractive Valuation: Long term earnings growth outlook of 20%+ justifies current premium valuation multiple of 24.6x P/E.

In terms of numbers, Marksans can potentially deliver 18-20% revenue CAGR and 25-30% bottom-line CAGR over the next 5-10 years. This along with PE expansion can make stock a multibagger.

Short-Term Performance of Marksans Pharma

The short-term performance of Marksans Pharma can be influenced by several immediate factors:

  1. Market Conditions: The pharmaceutical industry can be impacted by short-term market fluctuations due to policy changes, health crises, or economic conditions. Marksans Pharma’s performance in the short term will partly depend on how it navigates these market dynamics.
  2. Operational Efficiency: With an OPM of around 20.1%, Marksans Pharma has demonstrated efficient operations. This efficiency is crucial for maintaining profitability in the short term, especially in a competitive market.
  3. Financial Health: The company’s low debt level and healthy cash reserves provide it with the financial flexibility to manage short-term operational needs and unforeseen challenges.
  4. Product Demand: The demand for its key products, particularly in the Pain Management and Gastroenterology segments, will influence short-term sales and revenue. Any significant changes in demand patterns due to seasonal factors, healthcare trends, or competitor actions could impact short-term performance.
  5. Regulatory Changes: Short-term performance can also be affected by regulatory decisions, both domestically and in international markets. Compliance with regulatory changes and quality standards is essential for uninterrupted operations.
  6. Global Economic Factors: Economic conditions, including exchange rates and global trade policies, can impact the company’s export business and overall profitability in the short term.

Considering these factors, while Marksans Pharma is positioned well in terms of operational efficiency and financial health, its short-term performance will be subject to market conditions, regulatory environments, and immediate demand trends. Investors should monitor these factors closely for any significant impacts on the company’s short-term financial results.

In the near term of 6-12 months, Marksans Pharma is expected to continue its growth momentum aided by the following factors:

  1. Strong Q2FY23 Results – Revenues grew by 17% YoY while PAT grew 39% indicating steady performance by existing portfolio
  2. New Product Pipeline – Company has indicated 5-6 new launches this fiscal year including injectables which can boost growth
  3. Rising Exports – Fresh approvals in Latin America, Africa and Asia will help achieve 50%+ growth in exports revenue
  4. Forward Integration – Acquisition of Bristol-Myers manufacturing facility positions company well to capitalize export demand
  5. Supportive Industry dynamics – Retention of EBITDA margins at 21% highlights ability to navigate pricing pressures

Overall, Marksans earnings are projected to grow at a healthy 25% in FY23E itself led by new launches. The stock can potentially deliver 25-30% upside over the next 6-12 months on the back of double digit earnings growth.

 

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