Recommendation: Book Profits!
CMP: Rs 98
Key points:
- Marksans Pharma's (Marksans) performance in FY2007 has been extremely disappointing. The company's revenues declined by 17% whereas its profits plunged by a massive 56% to Rs 9.9 crore. The company has reported poor revenues in all segments of its business. Sales of bulk drugs have decreased by 35.8% year on year (yoy), led by the decline in bulk drug sales in domestic and export markets, whereas the sales of formulations remained flat at Rs 136 crore in FY2007.
- Ciprofloxacin and Ranitidine form the mainstay of Marksans' bulk business. With increasing commoditisation and competition from Chinese players, the prices for Ciprofloxacin bulk and Ranitidine bulk have fallen by approximately 28% each in the last one year, leading to a decline in the realisations. Due to this, the company's bulk business has plunged by almost 36% in FY2007 and 42% in Q1FY2008. The uncertainty over the future prices of these bulk drugs is a cause for concern and makes Marksans' bulk business unpredictable.
- Marksans had raised $50 million in November 2005 through a foreign currency convertible bond (FCCB) issue, primarily to fund acquisitions. Even though the redemption date for the FCCBs is distant--in November 2010--yet the conversion price of each bond into an equity share stands at Rs 336.92, which is almost three times the current market price of Rs 98 per share. Further, if the bonds are not converted into equity shares by November 2010, Marksans will have to redeem the bonds at 145.2% of their principal amount.
- I believe the risk of non-conversion and the resultant burden of the redemption premium are causing Marksans to retain the FCCB money as cash instead of deploying it for acquisitions. Despite giving repeated promises and timelines, the management has not been able to deliver on several counts, ranging from growth in the domestic market, to execution of the CRAMS orders and approval of regulatory filings.
- The company seems to be in an investment phase, planning for its future growth in the domestic market and its foray into newer markets such as
- In view of the disappointing performance in FY2007 and the uncertain outlook on the future prospects of the company, I advise investors to book profits on the stock.
