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Alkem Labs

Alkem Labs:

This is the investment that I made as follows:

13/10/2016 : Bought 50 shares at ₹1,697

The current market price of Alkem Labs is ₹2,276.

Overall profits to date : 34%.

Company : The company is a leading generic pharmaceutical player. They have operations globally and US is their key focus market. Further information about the company is available on their website.

My rationale : I invested in this company due to its revenue growth potential. The company has doubled its revenue from 2013 to 2017. The profits before tax has grown 85% during the same period. The generics market is lucrative as they are exact replica of the original branded medicines while costing a fraction of branded products. With an increased spend in medical expenses and our current lifestyle diseases, this company is bound to benefits from these health trends.

 

I evaluated the financials as follows :

  • RevenuesSame as your monthly or annual salary.

YoY (year on year/annual) Revenue growth : 2014/2015/2016/2017 has been 15%/19%/21%/14%

The revenue for this purpose is the total revenue for the company.

Takeaway : The company has been able to grow their revenues consistently from 2013 to 2017. The trend did slow down for FY2017 which presents a source of concern when you are investing in the company. This is the reason that I am in a wait and watch mode for further investments in this stock.

  • Total cost for the companysimilar to your expenses (rent, Uber, Ola, petrol, food, etc) to earn the salary.

Cost growth 2014/2015/2016/2017 has been 21%/21%/15%/13%

Takeaway :The company’s expenses growth rate has been improving over the past years. For 2014 and 2015 the expenses growth rate was higher than the annual revenue growth rate. From FY 2016, this trend has reversed, which reflects that the company management has been able to manage the variable expenses in an efficient manner. (Put simply, the company is spending relatively less money for every additional rupee of revenue)

  • Profit/Loss before taxSimilar to your savings at the end of year (Annual Savings = Annual salary – Annual expenses). A difference is that you pay the tax before the monthly salary reaches you.

Growth 2014/2015/2016/2017 has been -10%/6%/62%/20%

Takeaway : The efficient expenses management are reflecting in the bottom line of the company. The profit growth has been increasingly strong from 2013 to 2016. For FY 2017, the annual profit growth reduced to 20% (v/s 62% in previous year), primarily due to significant higher investments in inventories and higher other expenses.

  • Cashflow : The companies are allowed some non cash expenses (e.g. depreciation) to help them replace those assets at the end of their useful life. A cashflow statement provides you with the information on how the yearly cash profit is used in following :
  1. Investing activities : investing in different options to help them excess money grow
    • This is similar to you investing your extra cash in PF, PPF, mutual funds, equity shares ULIPs etc to have interest income or principal appreciation.
  2. Financing activities : shows if the company is repaying or getting more finances (a negative number might mean that the company is repaying its debt and hence reducing its interest payments for next years)
    • This is similar to you repaying your car or home loan during the year from the Bonus or increment during the year. 

The company has been using its profits from operations as follows :

  • Investing activities : the company seems to be in the process of using their investments in order to pay off their debts in the financing sections. In 2016, the company paid off 960cr of financing, partly by using 310cr from investments.
  • Financing activities : The company paid off almost 1,100cr of financing in 2016 and 2017. This seems to reflect the company’s active decision to pay down their debts. This is also a positive since the company is trying to reduce its debt financing and hence, avoiding interest payments for the future.
    • Financing costs for the company has reduced from 73cr in 2015 to 24cr in 2017. This is similar to reducing your EMIs when you pay off your loans OR parts of your loans.

Other things to note when buying a stock:

  • Trading volume : the number of share bought or sold on a given day.

Note : The higher the trading volume, the better it is. If you are not comfortable with the investment, it allows you to sell it easily.

  • Price charts : these are simple line charts, showing the price movement for a period of time.

Note : This is a simple line chart, as most of you probably use in your daily work. It is recommended to track the price for a long time period (1-3 years) to have a more consistent performance outlook.

  • Quarterly results : the revenue, costs, profit before tax analysis can also be replicated for the company’s quarterly performance analysis. Very similar to how you have a mid year performance review in your jobs.

 

Why did I invest : This company is in pharmaceutical industry, which is my preferred investment industry. The medical spend has been growing over the past years and the lifestyle diseases make it a necessity to consume medications. In the developed world, the governments bears the costs of medical care. They are looking to provide effective medical care to their citizens by sourcing fairly priced medication and spread their sourcing wider (diversify from big pharma players to more suppliers). Alkem seems to be positioned in the marketplace to take advantage of these developments.

Other useful pages :

Online resources for Industry research

Online resources for Consumer research

Online resources for miscellaneous trends

Mutual Fund series : Why mutual funds?

 

This is a personal investment strategy that I have used for myself. The investment made is real with my own personal money. The purpose of this post is to educate the reader on how to evaluate the financials of a stock and make informed decisions for his investments. All investment decision carry financial risk and you should consult with an investment professional before making any investment decision

Stocks

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