Heard of one-stroke wonders? This is a term that is usually used in the sport of Cricket to describe batsmen who perform once in a crucial situation and help their team win but can not do anything great after that. Now a days, it has also become a trend to ‘Go Viral’. You would have observed that when something goes viral on social media, people remain crazy about it for a few days or probably weeks but then, forget it. By now you would be wondering, why are we telling you all this?
Well, you would have surely heard of the drug introduced by Glenmark and Cipla, two prominent pharmaceuticals, for the cure of Covid-19. These two companies (and specially Glenmark) saw the immediate effect on their stock prices on the day this was announced. Glenmark’s stock rose by 35% on that day! The investor sentiment was clear but probably the investors missed out on some points which we will highlight in the following section.
What Does This Mean?
Glenmark possesses a product portfolio which can be easily considered weak as compared to industry leading Indian pharmaceuticals. US is one of the biggest pharmaceutical markets in the world and drug approvals filed/pending with USFDA define the core business strength of an Indian pharmaceutical. Because, NDA (New Drug Application) if approved is capable of bringing handsome revenues in future. On this front, Glenmark is not that strong. However, Cipla is still in a better position than Glenmark in this case.
The investor sentiment revolves around the future earnings or growth potential of the company. When Glenmark and Cipla announced the drug(s), market responded in a very positive manner. But, here’s a catch. These are generic drugs and therefore, the company won’t be able to earn much out of sale of these drugs. Also, the Coronavirus is not going to last forever so definitely the company can not depend upon Covid drug for its future growth.
Coming back to where we started from, prima facie the rise of Glenmark’s stock looks like a one stroke wonder or in other words a very short term prospect that gathered sudden attention of the investors. By the way, reportedly Glenmark is one of those pharmaceuticals which has to spend a higher percentage of its revenue on marketing. As per the stats, amount spend on marketing for selling each unit is higher for Glenmark when compared to other prominent pharmaceuticals. So, now you would agree that the sudden rise in stocks of Glenmark and Cipla can not be justified.
Balmer Lawrie & Company Limited (BL)
It is a Mini-Ratna government of India enterprise established by two Scotsmen, Stephen George Balmer and Alexander Lawrie in 1867. It is one of the actively traded companies in the club of century-old organizations. It is the first PSU featuring in the top 500 companies in India. BL is engaged in manufacturing and services businesses with 6 business units. Its manufacturing segment includes industrial packaging, greases & lubricants, and leather chemicals and services segment includes travel & vacations, logistics, and refinery & oil field services. BL operates in India and abroad with its two subsidiaries, three joint ventures in India, and two joint ventures abroad.
The Indian packaging industry can be broadly categorized into industrial and consumer packaging which can be further classified based on size, type, flexibility, material, etc. With its state-of-the-art production facilities, this business unit operates through 7 manufacturing plants across India. BL is India’s largest 210L mild steel drum manufacturer and a leader in the Industrial packaging segment with a market share of more than 34%.
Based on the requirements of its clients, it manufactures a variety of products that are used for packaging additives, chemicals, food & fruit pulp, edible oils, and various liquid and semi-liquid substances. BL’s industrial packaging is known for its product quality, high reliability, and customer-centric approach. It enjoys high brand value from its large, diversified, and growing customer base and pan India presence. The focus on continuous improvement, quality assurance, and constant innovation has helped in maintaining a competitive edge over others.
With an estimated market size of around 1800 million litres, India is the third-largest lubricant market in the world. BL has pioneered the manufacturing of grease in India, marketing, and distributing under the brand name of Balmerol. The firm has observed lower margins in the lube segment owing to intense competition by the presence of global and local players and their aggressive strategies to capture more market share.
However, it continued to remain in this segment to improve its capacity utilization. It also offers products required at various stages of leather processing. But this segment is facing challenges from its substitutes such as artificial leather, competition from MNCs, and growing environmental issues with the processing of leather.
The services sector continues to drive the bottom line of the company. The development of infrastructure (road, rail, airways, and waterways) has helped to streamline its logistics business by the cost-effective flow of goods. Leveraging its strong logistics infrastructure, BL provides 360-degree logistic services. This strategic business unit consists of 4 main segments of Container Freight Stations (CFS) in the vicinity of ports, Warehousing & Distribution (W&D), Cold Chains, and Multi-Modal Logistics Hub (MMLH). With the implementation of new government policies for promoting Direct Port Delivery (DPD), the volume in the CFS segment went down by 2% in FY19 resulting in lower revenues, and earnings.
Its W&D segment works on Build, Operate, Manage and Maintain model and plays a vital role in the supply chain of various companies. Also, the logistics segment is thriving with its 3 cold chain storages and is planning to commission a new one in Bhubaneshwar by FY21. The company has seen a digital transformation in freight forwarding which changed the way the transactions are carried out. Most of the processes are mechanized now, reducing operational costs. Airfreight services contribute around 2/3rd of the total revenue of the logistics segment. However, it has observed an overall reduction of 10% in the bottom-line of this business due to moderating economic conditions and severe price competition.
BL is one of the leading travel management companies in India operating with its 12 IATA approved branches across the country catering to a large section of government and PSU customers. In the past 2 years, this business unit has performed well in terms of both turnover and profits. It has also started a new initiative of the Self Booking Tool (SBT) for large organizations and corporates to increase visibility and transparency on the services provided. The vacations vertical of the company has designed its products in line with current market trends and priced competitively.
After thorough research, suppliers are selected, and employees are trained to provide end-to-end niche services to both retail and corporate customers. But this industry is experiencing huge market competition where many big players are adopting aggressive marketing strategies and offering huge discounts may affect the business of BL in both the short and long run. The refinery and oil field services business unit has pioneered sludge processing for refineries and oil exploration companies and captures around 70% market share in India. This segment is constantly facing challenges with respect to trained and skilled manpower for carrying out site operations. Another threat is arising with the entry of new players and emerging technologies for sludge processing.
Given its expertise, 150+ years of industry experience, and diverse business portfolio, it has been able to successfully leverage its strengths which helped in continuously innovate to be a future-ready company. Being a virtually debt-free company, it has been maintaining a healthy ROCE of 22.18% over the past 3 years and is consistent in distributing dividends.
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