Question

Hikma pharmaceuticals & Dar Al-Daw’a pharmaceuticals are operating in the same business. Dar Al-Daw’a gets all its business from 3 large customers. While Hikma has a more diversified portfolio of customers with 300 customers. Assuming that the firms are of similar size and have similar operating income, which firm would you expect to have more bankruptcy risk and why?

Answer 1

Hikma pharmaceuticals & Dar Al-Daw’a pharmaceuticals are operating in the same business. Dar Al-Daw’a gets all its business from 3 large customers. While Hikma has a more diversified portfolio of customers with 300 customers. Assuming that the firms are of similar size and have similar operating income, which firm would you expect to have more bankruptcy risk and why?

Portfolio of customers and the pattern and nature of the customers shall have significant impact on the business. While there are certain pros and con of having few but large key customers vs diversified large number of customers, there are many factors to be considered for determining the impact on the working capital cycle of the company.

Few large customers:

Pros:

- In this case, the relationship between the customers and the company shall be very bonded as business is in between these few customers and the company.

- Consistency of the business can be expected in this scenario.

- Customers shall play a key role in the sales revenue of the Company and some times shall be the determining factor.

- Invoice financing can be easy as the business is with key large customers in sales volume.

- At times of need, the company can request for the Advance Payments based on the agreed contractual arrangements, for future supply of the products. This shall help the company in challenging times.

- Even these large customers do have dependency on the company towards supply of products for their purpose.

Cons:

- There is a chance that the customers, as a group, may behave monopolistic and can determine Pricing of the products. This shall have significant negative impact on the company.

- The Receivables collection patterns might as well get disrupted due to this strong hold of customers.

- This shall have significant impact on the working capital of the company.

Diversified Portfolio of customers:

Pros:

- Customers shall be more dependant on the company for product supply;

- Company shall be the Price deciding authority.

- Considering divesrsified portfolio, the receivable collections are expected to be consistent , across.

Cons:

- Invoice Financing etc shall not be extended by the Lenders, owing to invoives with multiple customers. In this case, the company can go for Factoring of receivables, which result in additional cost.

- The company cannot expect any Advance payements from these customers at challenging times.

Based on these scenarios, it is a matter of argument on which mode shall be more risk from bankruptcy. However, considering the challenging times for any company, the key customers with Mutual Relationship shall be more accomodative interms of supporting the company with advance payments, etc; Also, the company can immediately get financial help thru Invoice financing etc.

Hence, in this case, I believe, Hikma with large diversified portfolio of customers shall have more risk of Bankruptcy than Dar-Al-Daw.