5 February 2019

Gufic Biosciences Stock Analysis

Gufic BioSciences stock has delivered 20x returns in the last 5 years. This multibagger stock is on the radar of many investors and is a common name in high growth screens. The stock has corrected by ~47% in the last one year. However, in the same period the revenues and profits have consistently grown. Does the recent correction offer a good chance to invest in the stock for the long term?

Gufic BioSciences Business

The company was established in 1970. It has a presence in the pharmaceutical space with it’s products ranging from API’s to bulkdrugs and personal care products. The company is also into the business of contract manufacturing.
The promoter holding has reduced from 69.98% in Q2FY18 to 65.75% in Q3FY19.
The share of consumer business has gone down to zero while the formulations (pharma) business’s share rose to > 90%.

Financial Snapshot

  • The company has consistently grown it’s revenues in double digits for the last 10 years.
  • The net profit margins have increased from 2.1% to 5.56%.
  • The fixed-asset turnover has risen from just 3.21 to 13.48! This is a meteoric rise. However, the total asset turnover has increased from 1.05 to just 1.27.
  • Although profitable, the company has reported negative operating cash flows for the last 3 years. Over the last 10 years, the company has earned a profit of Rs 49.16 Crores but the operating cash flows were just Rs 29.11 Crores.
The working capital requirement has become heavier over the years. The WC-to-Revenue ratio stood at 36.1% in FY18. The inventory days have grown to 114 from < 80 till a few years back. The debtors as per FY18 financials were Rs 81 Crores. This figure is nearly 5 times the FY18 profit after tax.

Red Flags

The company’s debtors are given a credit period of 30-90 days as per the management’s comments. However, the receivables due beyond the due dates are very high.
The receivables due for more than 90 days after the credit period is ~ Rs 16 Crores, which is almost 87% of the FY18 profits. However, the company has just created a provision for Rs 5.85 Crores on the basis of “Due after 6 months of due date”.
The above image is from the Auditor’s Report in the 2018 Annual Report. One has to be careful as the management might be under-reporting the bad debt. The auditors have also flagged off the lack of internal controls in the review of receivables and recoverables.
There are also a lot of related party transactions. The promoter group has interest in many companies which use the name Gufic. Infact, one of the private companies has the name Gufic BioSciences Private Limited. Almost 14% of sales and 10% of purchases are made with Related Parties. Are the promoters running similar businesses using the Gulfic BioScience brand name?
Further, we do not understand the exponential growth in revenues without any material change in the net fixed assets. Gufic BioScience has a fixed asset turnover ratio that would put other pharma companies to shame.
The above chart shows the Fixed Asset to Turnover ratio of mid-size bulk drug makers. Gufic BioScience has a ratio which is way beyond the industry average.


Avoid – Irrespective of growth and valuations.

No comments:

Post a Comment