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SES highlights long receivables period for Indian pharma companies

Report says leading pharma firms have long periods for realizing cash on sales, which raises concerns over the risks associated with a stressed working capital cycle


The report, which compared receivables turnover ratios of 24 pharmaceutical companies for last three fiscal years, showed that Glenmark’s receivables turnover ratio at 2.00 on a standalone basis and 3.03 on a consolidated basis for 2015-16 was the lowest. Photo: iStock
The report, which compared receivables turnover ratios of 24 pharmaceutical companies for last three fiscal years, showed that Glenmark’s receivables turnover ratio at 2.00 on a standalone basis and 3.03 on a consolidated basis for 2015-16 was the lowest. Photo: iStock

Mumbai: Leading Indian drug makers like Glenmark Pharmaceuticals Ltd, Lupin Ltd, Aurobindo Pharma Ltd and Dr Reddy’s Laboratories Ltd have long periods for realizing cash on sales, which raises concerns over the risks associated with a stressed working capital cycle, according to a report by Stakeholders Empowerment Services (SES), a non-profit corporate governance research and advisory firm.

The report, which compared receivables turnover ratios of 24 pharmaceutical companies for last three fiscal years, showed that Glenmark’s receivables turnover ratio at 2.00 on a standalone basis and 3.03 on a consolidated basis for 2015-16 was the lowest.

Lupin, Aurobindo Pharma, Dr. Reddy’s Laboratories and Nectar Lifesciences also featured in the bottom-five list for receivables turnover ratios.

Receivables turnover ratio is an accounting measure used to quantify a company’s effectiveness in extending credit and in collecting debts on that credit. It is calculated by dividing the net value of credit sales during a given period by the average accounts receivable during the same period.

GlaxoSmithKline Pharmaceuticals Ltd had the highest receivables turnover ratio at 21.78 on standalone basis and 21.87 on consolidated basis for 2015-16, followed by Abbott India Ltd, Novartis India Ltd, Sanofi India Ltd and Pfizer Ltd, as per the report.

SES said in the report that there was a large divergence in receivable turnover ratio of these 24 companies, which could be attributed to various reasons but these should be spelled out in a transparent manner by companies. On standalone basis, the range of receivables turnover ratio was 2.00 to 21.78 and on consolidated basis, the range was 3.03 to 21.87.

High days sales outstanding or low receivables turnover ratio has a negative impact on company’s performance for mainly two reasons—one it blocks working capital which makes operation costly and involves extra capital, and secondly it may turn out to be risky as it may force a writeoff in the future and consequently adversely impact earnings, SES said in the report.

SES said receivables turnover ratio of a company is reflective of competitive strength of the company and an important measure to assess how effective and efficient a company is in managing its working capital, extending credit as well as collecting debts. In general, lower ratio indicates either sticky debtors or inefficient management of debtors.

Vishal Manchanda, research analyst, pharma at Nirmal Bang Securities, said, divergence in receivable turnover ratio can be attributed to several factors such as type of customer, bargaining power of the company, number of suppliers, company’s credit policy and geographical spread.

Elaborating on these factors, Manchanda said if a company is supplying products to hospitals, the receivable cycle is long but the cost of distribution is lower. Also, bargaining powers of innovators is higher compared to generic players because competition among generics is high.

While the data from SES shows multinational companies have better managed debtors compared to Indian family-promoted firms, five analysts that Mint spoke to said Indian companies have majority of the business coming from international markets and hence their receivable cycles cannot be compared to Indian subsidiaries of multinational firm that operate only in the domestic market.

In the US, receivables period is 60 to 100 days and that in emerging markets, including Latin America, Russia, and Africa, is more than 100 days, which impacts the receivables turnover ratios of Indian companies but that is the nature of the business and norms in each market are different, said an official at a major Indian pharmaceutical company, who did not wish to be named as he is not authorized to talk to the media.

SES analysis also revealed that companies with higher exports have a below average receivables turnover ratio but the impact of the same is not uniform, indicating that no proper pattern can be established.

The receivable cycle impacts the cash flow of a company and therefore has a bearing on the valuations. An analyst with a domestic brokerage house said, usually, a company with sticky working capital issues is valued less than its peers but receivables turnover ratio is only one of the indicators for gauging a company’s future performance. Investors have to watch out for other factors such as company’s ability to improve profit margins and product mix.

SES has recommended that companies must disclose their credit policy, period and improvement on year-on-year basis at least in the annual report every year for the benefit of shareholders.

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