Could be a precursor to an eventual sale of the business or getting a strategic/PE partner in the business…will be interesting to know ….
mostly in all pharma companies the business in various countries is done by the subsidiary model only. there are pros and cons of this
any penality or problem with one country is isolated with that. it can be wound up in extreme cases without need of further capital or without affecting business in other countries.
different companies means more mangement bandwidth.
sale of business can be there.
if subsidiary is set up in different country, there is ease of operations like lesser approvals (just 1 country instead of 2).
this is industrywide practise… so i think there is nothing to worry about.
I dont follow Divis but a cursory look at them, over 3 years they have had zilch eps growth
All the conversation needs to be understood wrt valuations…
The company is richly valued be it sales to market cap or book value to market cap wise…
The rich valuations were derived from the fact that the company was growing at much above the industry average and all payments in advance from customers.
Both of these theories are busted for now so the company does not deserve this kind of valuation and this is what market thinks that’s the reason it has not moved in fact dropped by almost 50% since last August (2017), mid cap melt down happen only in February 2018.
I can argue on facts not expectations or just urge to argue.
Disc: Vested interest and biased views
Company has decided to divested its USFDA approved injectible plant in to another company (a 100% owned subsidiary of Caplin points ltd) and plans to explore stake sale in this entity.
The divestment is expected to be complete by Jan 19. However, the company has not disclosed details on stake sale in the press release. Let’s wait for more details.
Disc: Vested interest and biased views
Issue of CCPS to Eight Roads Ventures India Ill LP. and F-Prime Capital Partners Life Sciences Fund VI LP. These preference shares issued for Rs 218 cr will be converted to equity for a minimum share capital of 25.29%.
Effectively valuing the subsidiary at Rs 862 cr 3-4 years hence.
*** As per my understanding of further reading of the notification, since, the issue is of Preference Shares which are to converted compulsorily after some time (not disclosed), the maximum value till that time is Rs 862 cr. They will hold at least 25.29%, does that means if the performance is not up to mark, their equity share may rise further??
Caplin Steriles Limited, the wholly owned subsidiary company of the Company will issue 7,45,82,875 Compulsorily Convertible Preference Shares of Rs.10 each (“CCPS”) at a premium of about Rs.19.23 per share to the Investors in two tranches (subject to applicable laws and fulfilment of terms and conditions of the Investment Agreement) .
# of convertible shares is fixed, so I don’t think that if performance is not up to mark more shares will be issued. I think they mean that if Caplin Steriles issues more shares in future then it means that Caplin must make sure the investors don’t get diluted below 25.29%.
Do we know how much money was spent on this unit and how the valuation of 826 cr compares with revenue and profit of caplin steriles? thanks!
Conversion rate is not known. How many equity shares for 1 preference share?
Anyways, it my opinion. The basis being why not issue equity shares directly and why take the route of preference shares and then getting them converted. If it were not to save against any capital loss, then what?
Regarding revenue and profits, I do not think there is much information available. I do not think there are any material sales from this company yet.
I don’t think this is kind of book fixing, as these types of terms need to be there when investing in a company with no material revenue. Only thing they have is a USFDA approved plant, but I do not think they have started shipments to USA.
I agree, without any evidence I don’t think you can say book fixing etc. The company is getting 218 crores of investment into its subsidiary which doesn’t have any revenue. I don’t see hwo this is book fixing if cash is going up.
I’m sorry but thats just a very silly statement to make. You think a group like Fidelity who’s one of the world most renowned financial institutions with over $2 trillion AUM will get into a company without any due diligence? No offense, but we need boarders to make informed responsible statements, because Valuepickr has a good name in the investment community…
Anyway, my take on the topic is - similar to what Strides have done with Agila and Cipla have done with Cipla health, this seems to be a move to unlock value from their injectable business for the US. Instead of diluting in the parent company, they seem to have subsidiarized one arm of the business and raised funds there. As per their earlier statements, they were spending around 60cr a year on this company as Opex, which means now they can start to use this 60cr for expansion into other areas, as I guess this 218cr from Fidelity would be used purely for the injectable business.
Seems like Biocon is doing something similar for their Biosimilars business:
And Glenmark for their API business:
So I spoke to the COO and he confirmed that the preference conversion is on a 1-1 basis. So the maximum stake Fidelity can get is 25%.
Also they invested in total 380 crores into this injectibles plant so management is quite happy with a valuation of 870 crores.
The company is going to focus on complex molecules in the regulated space and is focusing on R&D. Due to stability issues with complex molecules they are high margin products.
Company has got 2 ANDAs approved and 2 more will be approved by March. 6-8 more are going through the approval process.
Main reason for choosing Fidelity is their contacts in the regulated healthcare industry which would help Caplin open doors which they themselves cannot do.
I leave Boarders to make their own judgements
one final thing is fidelity is looking at an exit in around 5 years time, typical with PE/venture cap investments.
caplin is also organising a conference call on 11th of february. so boarders can ask management any questions about the business etc. details on corporate announcements page of bse.
Any one having call transcript please share
concall transcript availble in company website investor section
Hi, can anyone list the risk with the company in current scenario? I have started tracking the company and it seems it have good financial like ROE and ROCE with low debt. But I am not able to understand why company is available at low PE as compared to other pharma companies. Is it due to the factor that company is not doing business in US and is active in Latin America?
Hey, I too was confused about this. Receivables have gone up. There used to be a negative Working Capital cycle but currently receivables are as high as 25-30% of sales. Now this is a big change in itself but when you look closer, you realize it’s not that big a deal:
- CPL is targeting Government agencies to win big tenders instead of selling to the final consumer in Latin America. These agencies demand a 90-day receivable cycle. This is not specific to CPL and is a industry-wide practice
- It is also targeting newer markets, namely, US, EU and China where once again they demand a high receivable cycle
- What one must note that CPL has 100% conversion of receivables into actual cash flows over the past couple of years and is running a WC ratio in-line with other industry peers
I would also attribute the uncertainty of entering into new markets as a reason for the discount. I’m personally confident about the companies audacious efforts to lead the market
The stock has rallied 33% in the last 12 days while the NIFTY Pharma index has corrected by 5% despite the NDA win. This company is certainly doing something correct that the rest of the industry has missed out on. Inviting critical views
Higher receivables and general downtrend in Pharma & MidCaps had kept the stock low. After good quarterly results and NDA’s win, it is getting market traction again.