IBL Healthcare Limited (PSX: IBLHL) was established in 1997 as a private limited company, as a subsidiary of The Searle Company Limited. International Brands Limited is its ultimate parent company. It was not converted into a public limited company until 2009.
The company functions essentially as a marketing affiliate; it markets products under licensing agreements with global companies like Nestle Health Science, Meditech, Mepaco (Egypt), and Mead Johnson Nutrition, to name a few. It’s primarily present in the healthcare market comprising of infant formula, adult nutrition and medical disposable products
Although the company is part of the pharmaceutical industry, but since it provides services, there is no capacity utilization to be determined.
The vast majority of the shares are naturally held by the associated companies, undertakings and related parties- at more than 70 percent. Of the total nearly 75 percent, 72 percent is with the holding company The Searle Company Limited. Another major 19 percent is distributed with the local general public. The directors, CEO, their spouses and minor children have almost always had a share of less than 1 percent.
Historical operational performance
IBL Healthcare Limited has consistently experienced a positive growth in its topline over the years. In FY15, its revenue grew by a marginal 2 percent despite the launch of new products and extensive promotions. Despite a minor growth in topline, the company managed to improve its gross margins as cost of purchases reduced during the year. Cost of purchases also include the amount for custom duties and sales tax which were Rs 17 million lower in FY15 compared to last year. The effect of improved gross margin trickled down to the bottomline as administrative and distribution expenses increased by a small percentage mostly due to the salary expense.
Although topline grew by a considerable 24 percent in FY16 as a result of continued promotional expenditure, its effect could not be reflected in higher gross margins; rather gross margin reduced in FY16. This was so because the higher sales were accompanied by an even higher change in costs. Since the company is primarily a marketer and a distributor, it does not have costs related to manufacturing; instead, its costs are mostly related with purchases of finished goods from its partners. The purchases during FY16 came with much higher custom duties and sales taxes- an astounding 129 percent increment in the former, which squeezed gross margins for the year. With few changes in other factors, operating and net margins also followed suit.
In FY17, the company again saw a marginal growth in topline as it increased by nearly 3 percent. The lower sales were due to intense competition in the industry with the entry of new players which introduced cheaper alternatives in the market. Costs remained more or less unchanged as a percentage of revenue despite the company’s claims that custom duties had risen; purchases made during the year were also lower than those made in FY16. Therefore, there was little change in gross margin year on year. Operating and net margin on the other hand saw a rise on the back of other income which doubled. This was derived from interest and rental income.
Despite the uncertainty that prevailed during FY18, with elections due at the end of it and significant currency devaluation, the company managed to grow its topline by 14 percent. However, the higher revenue could not be translated into better margins as the business is entirely dependent on imports. With a weakened currency, their cost of purchases went up by almost 27 percent which restricted the profit margins from improving. Operating and net margins were further pushed down as apart from other income reducing, other expenses which were nonexistent in the previous year, arose in FY18 as a result of exchange loss.
The start of FY19 was noted by the general elections, while political uncertainty prevailed in the second half due to tensions at the border. Despite, the unfavorable environment, IBL Healthcare continued on its growth trajectory as its topline increased by nearly 17 percent. It continued to spend heavily on distributions and promotions which resulted in distribution cost consistently consuming around 12 percent of the revenue. However, if one were to compare with other companies in the industry, it is relatively lower. With the company entirely dependent on imports, the increase in cost of purchases was unavoidable, thus consuming 72 percent of the revenue. Therefore, the decrease in profit margins was inevitable.
Quarterly results and future outlook
The third quarter ended in March 2020 saw a surprisingly significant rise in revenue, at Rs 720 million, despite the ongoing pandemic and a consequent lockdown of many cities. The cumulative nine months ended saw a 71 percent increase in topline in FY20. According to the company’s report, the rise in revenue is attributed to ‘induction of consumer and medical disposable business’ in addition to expanding product portfolio.
However, another plausible reason may also be that the consumers bought more than their usual spending behavior, since the company’s product offerings include infant and child nutrition, both of which are deemed essential items for the user. With a stable exchange rate, costs also reduced slightly, allowing profit margins to improve. A further boost was also brought in by other income arising from a net exchange gain. However, the elevated finance cost kept the net margin flat.
Given the nature of the product, there may be little changes on the demand side; however, the reduced business activity may affect the supply chain that could have an adverse effect on sales, although nothing can be said with certainty.