Caplin Point Laboratories


(Krishna) #1

Hi friends I stumbled upon this company Caplin Point Laboratories in Pharma Space.

Some Key Ratios

ROE: 25.57%

D/E: 0.20

P/BV: 2.70

P/E: 8.53

Almost 90% of the products is exported to markets like South America, Africa, etc…

The home page of company mentions they are in the process of constructing their latest and largest plant and once this is done they will venture in the developed countries like US, Europe, etc…

Looking at the growth prospects and the recent runup in the stock with hitting upper circuits, looks like some serious re-rating is happening in this company.


Forensics and the art of triangulation
(Bhupesh) #2

It wasscarily cheap till 6-8 month back … or we are missing something here!


(Krishna) #3

yes Bhupesh has quite a runup… but still looks cheap… would love a deeper proding into it which the speciality of valuepickr, unfortunately im not so good & learning valuation of companies…


(RsKm) #4

1st phase of the plant being built for requlated markets will be ready for commissioing in a few months. Capex for this is being done fully from internal accruals. co is cash rich, no debt. Company enjoys huge float by way of advance from customers. Plant for regulated market will be for sterile injectables. Strides, the largest in injectables, is trading at 53 pe and there are talks of strides selling part of its injectable business at 20x ebitda. stock could be a 10-bagger.


(Vimal Dixit) #5

figures are decent expected EPS '13between 11-12 even after more than doubling in recent past appearto be reasonably priced.

appears to be good find.


(Krishna) #6

Thanks Vimal, but what Im thinking is are the products good enough? hows the management. Seems like they dont have any special drug with patent or anything.

And the most important thing where is the AR of 2011-12???


(Vivek Gautam) #7

One thing good abtn the co is that it has cleared the 15 year thump rule as its nearly 20 year old co n is now flourishing. valauations are attractive n we need to dig more to find what it has been doing right for last few quarters ? Any moat for the co?


(Ayush Mittal) #8

Hi Friends,

I have been following this co for sometime and it looks very interesting to me. The co has grown steadily and they have been able to expand margins and seem to be moving up the value chain.

The most interesting part is the FY12 annual report - have posted it here -http://www.screener.in/company/?q=524742&c=105#docs. Key highlights:

1). The co has undertaken a major capex, by which their gross block should more than double. The capex is expected to be completed by Q3 or Q4 of this year.

2). The co is generating excellent cash flows. There is strict control on inventory and debtors despite regular growth.

3). The co is debt free.

4). Most interesting point is that the co is having advance from customers to the tune of abt 30 Cr+. Last yr it was 10 Cr. So this is very interesting for a 100 Cr turnover co. It may also be that some big co is backing them.

4). Last yr profits are after a forex loss of abt 4-5 Cr

Have a look at the details of expansion mentioned on their website:

http://www.caplinpoint.net/cpIV.htm

Being a small cap, limited details are available. Would be great if we caan dig out more.

Thanks & Regards,

Ayush


#9

A blog mentions it -http://cherrypicks.blogspot.com.au/2012/10/caplin-point.html


(Kiran) #10

I get really interested in stocks whenever there are customer advances. And when I saw 30% of current turnover in advances, it really got my attention. The numbers are there for everybody to see on Screener. I personally think this one is undervalued and have bought some quantity yesterday and today.

A few comments before I delve deeper into the analysis.

a) Not any and all pharma related stocks will command a premium PE (PE>15). Have a look at Medi-caps for example. So painting all pharma stocks with a broad brush would lead to erroneous analysis.

b) Yes, it was extremely under-valued say 4-6 months back. But at that point of time, I would not have invested since I would be speculating with the information that was available back then. Hindsight bias always strikes when a trade goes right. But now, with revised information and AR getting published very recently (maybe 15 days back), we now know that 30% of turnover is already advanced by customers and their plans and outlook for the future. With this new information, I saw it as undervalued at these levels and have invested in it. Of course, there is a possibility that the trade is wrong, but as long as I have convinced myself with available information and not shooting in the dark, I am ok to lose money.

c) The biggest gains are made, in my opinion, when businesses are on the cusp of growth and also come under the funds radar. This business is no doubt on the cusp of growth but fund recognition might take time since it is still a 100 cr turnover business. But 2-3 years down the line, if and when the hit the 300 cr mark, and if they continue with this performance, funds will jump in and that’s when you;ll see the highest gains. Not immediately.

Anyhow, enough of global stuff. So, as I said, I got interested in the stock due to customer advances, read through all available ARs and framed a list of questions. I contacted the best pharma analyst I know, Ayush and asked him these questions. I present the Q&A here. Caplin’s corporate office is in Chennai. So, if anyone here is from Chennai, please do make an effort to have an appointment with the management. I am sure if enough Valuepickrs see undervaluation here, we’ll not be short of an intelligent questionnaire. Chennai-folks, please raise a hand if you are interested.

Q&A with Ayush follows (K is Kiran, A is Ayush below):

)------

K: Business model of Caplin â Who are their customers? Aid agencies in Africa and South/Central America (AR 2009)? Why are they paying so much in advance? In 2009 annual report, Caplin clearly states that they insist on upfront payment. How does this work â in your experience, have you seen any other business like this?

A: Due to this being a small cap, there is not much information out there. My hypothesis is some big pharma co. is backing these folks and putting them in touch with various customers and agencies. This is most likely a B2B kind of thing and not B2C. The business value chain is not very clear even though I have been tracking this co. for a while now.

K: They keep talking of unique business model/unique marketing strategy in almost all ARs â any insights here?

A: Nope. An interview with management would help a great deal here. In my experience, they respond to any shareholder very promptly.

K: There doesnât seem to be any seasonality in the business. Even if you take out the forex gains in Sep quarter, year on year EPS jump is close to 70% which is extremely healthy.Expected EPS? I see it as 10-11 if a similar performance and margin basis continues and without forex gains. With such growth and even at 10 PE, we are looking at 50% appreciation.

A: Yep, even my guess is around the same level given no black swan event. I don’t know the how and why of forex losses last year and gains this year though. So unless we meet the management, we wouldn’t know at what levels have they hedged their exports.

K: This seems to be a clear traded goods, contract manufacturing play. Am I right in that? Why canât anybody do it? And why are net margins close to 10% in a commodity play?

A: Net margins are close to 8% and not 10%. See, the entire play here is they are moving up the value chain. From tablets and ointments currently, they are setting up an injectibles plant which have higher margins. Let’s say I assume the big pharma company helps them get through the US/UK FDA approvals quickly, and even the big pharma company squeezes these guys’ margins to the current level, the volume explosion from the current level itself should move them to the next orbit. Look, for a 100 cr turnover business, setting up a plant worth Rs. 25 cr would not have been a shot in the dark. They already might have a big customer or two lined up (maybe the big pharma co. backing them itself provides the demand and advances)

K: This new plant that they talk about â finish by Dec 2012 and commercial production by mid-2013. Shouldnât the authorities in US/UK give permission? And if their major customers till now are aid agencies, then how are they even penetrating this market and who are the customers buying this stuff? Doesnât the approvals time extend to a year or two?

A: If aid agencies are their customers, then I am not really sure how they would get the approvals so quickly. US FDA takes 1-2 years, but UK is pretty ok. This in turn, leads me to the hypothesis that some big pharma co. is backing them and hence the approvals would come in quickly, else they would not set up a 25cr plant just like that.

K: Argus Salud Pharma â in 2011 AR, they say this HP plant has handsomely added to the topline and bottomline. However, look at the current AR, and the consolidated is actually slightly less than standalone. Now, given that this is the only subsidiary, isnât the conclusion that Argus is just about breaking even?

A: Yep, this seems to be the only disconnect between the talk and walk of management. We should ask the management this question though.

K: Any cashflow â earnings mismatch you found?

A: Not as far as I could see. Taxes are being paid, dividends are being paid, fixed assets are growing, there is no inventory problem, there is no debtor problem, the balance sheet is in terrific shape.

)—

So, that was the end of our Q&A. If anybody here has any contacts in the pharma industry in Chennai, that’d be great and we can have a meet/call with the management.

What do you guys think of this story?


(Vivek Gautam) #11

The co had come out with an IPO nearly 20 years back n unlike so many companies of that time which vanished into thin air this company is still there n now flourishing is a very healthy sign. In fact on the co website there is a huge list of shareholders whose dividend are lying unclaimed. But the co seems to be a 1 man show . How is the 2nd line of command.

Also on Facebook its employees are found stationed in exotic places like Guatemala.

Management interaction is more important to find out if this Maruti 800 can become a Mercedes?? Scalability,size of opportunity n management FIB too needs to be figured out.

Let’s all once again put joint efforts for which Valuepickr is famous .


(mayur) #12

hi kiran,

you have rightly pointed out that company has been able to create good float out of customer advances since last year.but dont you think we need to dig out deeper to know whether this float is due to shortage, seasonality etc and therfore shortlived since its a very recent phenomena.


(Hardtoget) #13

Hi

I think the Unique Business Model is in somewhat explained on their website

http://www.caplinpoint.net/BModel.htm


(Ayush Mittal) #14

Hardtoget,

As per the link, it seems they have their own sales distribution network/channel. If so, its a very positive thing and nullifies my hypothesis that the advance from customer might be a advance from customer to support expansion. If so and if these kind of advances are maintainable with growth, it will be unique and great.

Lets try to dig out more and if possible do a management meet.

Ayush


(Manish Vachhani) #15

First Call Research gives a buy recommendation on Caplin point labs with target of 100.

http://www.moneycontrol.com/news/recommendations/buy-caplin-point-labs-target-rs-100-firstcall-research_806421.html


(RsKm) #16

First Call reports only reveal how much they do not know about the companies covered. These are cut & paste jobs.


(kushal dalal) #17

Ayush,

I tried to contact their Chairman C.C.Parthipan and he replied back with his personal email and cell number saying we can ask them questions and probably call him as well if required.

We can create list of questions initially and send them and then probably ask for personal meeting with management.

Let me know so I will share the cell number and his personal email with forum member.

Kushal


(Ayush Mittal) #18

Hi Kushal,

Thanks for the efforts. It would be great if we all can compile a good set of questionnaire.

Friends, please put in your questions.

Thanks,

Ayush


(Akshat Tiwari) #19

A few questions that come to my mind- Mostly related to qualitative aspects of this company:

Supplier Power

How big are its suppliers?

How easily is the raw material available? How volatile is the raw material price?

Is the company depended on a few key suppliers?

Any threat of forward integration by any supplier?

How do they manage raw material cost fluctuation?

Buy Power

Who are its Key Customers contract manufacturing space in India

Why do the buyers offer advances? Is it a precommitment contract?

Is there a threat of backward integration by any buyer?

Products

Key Products in terms of revenue contribution- revenue contribution by product category

Doesnât having more than 1500 products create problems in terms of identifying which products to focus on?

How many branded products are there? Revenue contribution by branded products?

Do they hedge for currency fluctuations??? COmpany says they are both importers and exporters due to their “unique business model”- i would expect they dont require forex hedging- Didnt find any mention of it in my cursory glance of annual report

Company has own depots in various countries- what stops them form booking spurious export revenues?(remember allied digital)- a point to ponder about?

Competitive Advantage Related

What is the companyâs market Share.? Is it growing?

Who are its key competitors

Key Differentiator- their unique business model- why no other pharma company has followed it?

Does the company have any patents?

How complex is the process of manufacturing companyâs products? Are their significant knowledge barriers?

High advances suggest pre commitment contracts by customers? How sustainable is this trend? How long does it take to sign on a new customer? Are these long term contracts?

Other Questions

What has been the capacity utilization of its existing facilties?

What is Customer split geography wise

Company ahs made foray in Bio Tech? Whats the potential? What % of revenues is contributed by Bio Tech?

What is the revenue split geography wise and product wise?

Revenue split in terms of export and domestic

What are the new products in pipeline?

Any Capex plan? Any plan to add more distributors?

Any lawsuits company is facing?

What is the exact nature of tax dispute resulting in a provision of over 1.7 Cr ?

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(Nooresh) #20

A quick note by one broking firm

Caplin Point Laboratories (Long]Term Bet in small]cap pharmaceuticals)

)

Industry Pharmaceuticals BSE Code 524742 / CAPPL

Company P/E 9xFYf13E 52 Week H/L (Rs) 94 / 22

Market Cap. (Rs) 135crs Promoter Holding 57% ( No Pledge)

Dividend 20% Face Value (Rs) 10

The story so far ccc…

Caplin Point Laboratories . CPL is a Chennai based pharmaceutical company into contract manufacturing which

converted into a Public company in 1994 and its IPO was oversubscribed ~ to 117 times. It merged May Labs . Chennai

during 2006 and Malind Labs . Baddi during 2009 so as to increase its production capacities and has 3 fully functional

manufacturing facilities in Pondicherry, Tamil Nadu and Himachal Pradesh. Mr Jayapal is the Managing Director and the

promoters hold a 57% stake in CPL

The Rs1bn CPL does contract manufacturing for a wide range of dosage forms (tablets, capsules, liquid orals, powder,

SVP, ointments and lyophilized products). CPL derives ~90% of its Rs1bn revenues from the international market (nonregulated

markets) and is presently expanding capacities to manufacture hormone and sterile injectibles aimed at the

regulated markets through facilities which would be compliant with the US FDA and UK MHRA.

The story ahead ccc…

The facility to manufacture sterile speciality products would go on stream in 3 phases . Phase -1 during Q4 of the current

fiscal, Phase -2 during Q2 next fiscal and Phase -3 during FYf14-15. CPL is virtually a debt-free company and has cash of

Rs275mn in its books as of June 2012 (CPL follows a June YE). We believe that CPL going forward would show enough

traction in its business year over year as its business model is evolving in the right direction. Despite being a

predominantly export driven company ( 90% exports) we are also impressed with its product lines for the domestic market

and our channel checks suggest that products manufactured by CPL is gaining acceptance rapidly during CYf12.

Imports constitute close to 40% of its revenues and the company wrote off an exchange loss of Rs50mn in FYf12 which

negatively impacted its profitability last fiscal (CPL posted a net profit of Rs82mn after the FX loss of Rs50mn). We

believe that its business model can generate an ROCE of 30% every year as we foresee revenues to grow @ CAGR of

50% over the next few years with a rise in profitability. We expect CPL to post an EPS of Rs10 this fiscal and Rs15 next

fiscal and recommend a BUY on the stock at current levels of Rs89 and at declines for a one-year price target of Rs200

S. Ranganathan

[email protected]

+91 22 66351270