Speed Read on FDC Limited Buyback Offer 2022 - vrk100 - 10Apr2022

Speed Read on FDC Limited Buyback Offer 2022

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(Disclaimer: This is just for information purposes only; this is not an investment recommendation. Prospective investors should consult their investment advisors before making any trades.)

 

• FDC Limited is an 86-year old pharmaceutical company
• It has presence in Ophthalmic and Anti-Infective segments
• Its Electral (ORS or oral rehydration salts) has 45 per cent market share in India
  
• It’s strong in energy supplements, like, Enerzal 
• Its other big brands include Zifi and Zathrin
• Zathrin (drug name Azithromycin) is an antibiotic to treat bacterial infections
  
• Zifi is from Cefixime category used as an antibiotic to treat infections
• Zifi has a market share of 24 per cent 
• Company's products, like Zathrin and Zifi, have benefited from COVID-19 Pandemic in the past--this sales momentum may not likely to persist in future as the COVID-19 seems to be less virulent now
  
• The company's portfolio includes formulations, active pharmaceutical ingredients (APIs) and functional foods
• It has 160 brands in India
• Its sales consist of 75 per cent domestic and 25 per cent exports (including to the US, the UK, etc.)
• Exports are Rs 325 crore
• Revenue from APIs (active pharmaceutial ingredients) is Rs 60 crore
• It has seven manufacturing plants located in Maharashtra, Goa and Himachal Pradesh
• For a long time, it is a zero debt company
• Its return on equity has been decent, around 21 to 23 per cent 
• All the above data are from its annual report of FY 2020-21
  
• Its current market price is Rs 282; market cap Rs 4,770 crore (end-08Apr2022)
  
• Foreign portfolio investor (FPI) holding is low at 4.5 per cent; Domestic institutional investor (DII) at 5.5 per cent and public at 20.7 per cent
• The company’s financial position is strong 
• Promoter holding is 69.4 per cent; there is no promoter share pledging 
  
• It has a healthy balance sheet
• Its intangible assets are negligible
• Over the past 10 years, the company’s share capital has been reduced due to constant buyback of shares
• In September / October 2020, it bought back 21.63 lakh shares at Rs 450 spending Rs 97.34 crore

 

Profitability:

• Its sales growth in the past five years is 6 per cent annualised
  
• Its net profit growth in the past five years is 12.2 per cent annualised
  
• As its sales in the US were down by 72 per cent in financial year 2020-21, the company's operating profit margin was under pressure
• Average return on equity (ROE) for the past five years is nearly 15 per cent, ranging from 13 to 18 per cent
• Operating profit margin for the past five years is about 23 per cent, ranging from 21 to 25 per cent
• As the sales for Oct-Dec2021 quarter were down, its operating profit margin fell sharply in the quarter
  

 

Solvency:

• It's traditionally a zero debt company
• The probability of the company going bankrupt is practically zero
  

 

Valuation 

• Its price-to-earning (P/E) ratio is 18.8 based on the trailing twelve month (TTM) earnings
• Its price-to-book (P/B) ratio is 2.4  
• Its price-to-sales (P/S) ratio is 3.1
• Considering the current valuation versus historical and industry peers, the current price of Rs 282 per share appears to be reasonable
• However, it may be better to wait out the closure of the current buyback (details below) before making any decision on buying of shares
  

 

To sum up:  

Indian pharma sector is highly complicated. It’s hard to analyse. FDC Limited is an established company with decent growth prospects, but we can’t expect miraculous growth from this company. Management quality is good. It’s not a favourite with the traders. 

The company has practically paid no dividends in the past five years. The cash distribution has been via buybacks in recent years—resulting in higher stake by promoters in the equity. The company has undertaken four share buybacks, including the current one, in the past four years.

Now, a buyback of equity shares through 'tender offer' route is coming at Rs 475 per share—for a total of 29 lakh shares, with the company proposing to spend around Rs 138 crore. It opens on 12^th April and closes on 27^th April of this year. The recent spike in share price is due to the oncoming buyback. Shareholders who have held shares as on 17Feb2022 can participate in the buyback offer.

The public announcement and board resolution of the buyback offer are available here and here. Once the buyback is completed on 27^th April, share price is likely to come down. Depending on the then situation and quarterly results, one can take a fresh look. Till then, it’s better to wait. 

What I have observed over the years is once the buyback is over (for any company—need not be just for FDC), a company’s share prices remains subdued for some period of time, until some new triggers are generated for the share price to react. The valuation appears to be reasonable and the stock is not on the radar of market fancy.

As this is a tender offer, promoters are eligible to participate in the buyback. And promoters have chosen to participate in the current buyback (promoters of some companies do not participate in the buyback even though they are eligible to participate). 

The company is focusing on the growth of formulations and APIs. It is proposing to introduce new products and increase exports in future. But the company spends very less on Research & Development (R&D)--which is barely one per cent of its sales for FY 2020-21.

As the price action of the FDC share has shown in the past three years, the stock is likely to test the patience of serious investors.

 

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References:

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Disclosure:  I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets. 

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