Caplin Point Laboratories

Apologies for the delay in posting the Q&A. I am sure there would still be a few unanswered questions. Shoot them out and I’ll try to get a reply.

To start off, Iâd like to say that the Chairman was very welcoming of questions. Before I get into Q&A, Iâd like to say that the Chairman sounded very honest, very ethical and ruthlessly focused on profits and cashflows than revenue growth. He gave a lot of personal background information on how he struggled from 1994-2000, how he had to run away to Angola (where a civil war was going on) to escape from huge debts back in Chennai, how his partners deserted him, how he has learnt his lifeâs lessons and how he despises debt now. The value system seemed very strong. (Of course, all sorts of biases play in here â and hence the usage of the words âsoundedâ and âseemedâ).

Now to the Q&A.

1). The co has scaled up well over last 10 years, However the growth over last 5 yrs has been steady at about 20%. Kindly take us through your journey. Business model, kind of products, distribution method etc. What were the major challenges during this time and how did the co overcome them?

Ans. Part of the answer above, in terms of personal background information. Also, in the early years of business, there was a lot of talent attrition since we couldnât match salaries. However, the Chairman hired people from his town/village, trained them in Spanish and placed them in Central and South America (and hence, loyalty is high). The way the business works is manufacturing happens at all three plants in India, medicines/ointments etc. are exported to Central and South America, where Caplinâs people take in the material and sell it to distributors and pharmacies. Caplinâs major markets are South and Central America (Mexico and Brazil, specifically) and growing in West Africa. Currently, 70-80% revenue comes through from distributors and rest 20% from pharmacies. The plan is to increase reach to pharmacies since margins are much better.

2). What is the USP of the co and how does it differentiate/value add vs other pharma players?

Ans. Caplinâs unique marketing strategy is a differentiator. Usually, such companies directly export it to an importer. However, the importer will shave off all the margins. Having our people there on the ground is a significant differentiator since we understand the markets much better. Secondly, for larger players, say 3000-4000 cr businesses, Central and South America are not huge markets. For a company of our size, this is an attractive and a growing market.

3). The unique point seems to be the niche markets like South America. Please give a geographical break-up and what are the reasons for Caplin’s presence in this area or why can’t other players break into these markets easily?

Ans. I understand these markets extremely well. We have been first-movers here and have deep relationships with large distributors and pharmacies. I think it is a unique competitive advantage with feet on the ground, relationships and first-mover advantage with deep understanding of the customers.

4). Co has been getting advances from customers. How and why? Usually other cos have high debtors while working in these countries.Is it brand? If yes, please share details. What are the terms of such advances…are they recallable?

Ans. The suite and range of products that we provide are a must-have for distributors. Distributors give advances since we give priority to distributors who give advances. If you look at our Balance Sheet over the past few years, there have been customer advances consistently. These customer advances are definitely sustainable and as long as we supply our products, there are no problems with re-callable.

5). Co seems to have undertaken a major capex. Please share details on the same. Size of facility, timeline, cost, kind of turnover it can generate.

Ans. It is a 75 cr investment. Since the company despises debt, we are going to take as minimal debt as possible. My focus is to fund it only through cashflows. However, worse-come-worse, we are not going to take more than 15-20 cr debt. The turnover it can generate is in the range of 300-400 cr in about 4-5 years.

6). The injectible space has few players (entry barriers?) and must be remunerative? If yes, how will the co execute the same as caplin has no experience in this area?

Ans. True. However, our focus is unregulated markets where the major players are not that widely present. Our plan is to build a lot of success stories and dossiers in unregulated markets before going to US FDA or UK MHRA to sell in their countries. Selling in developed countries is atleast 4-5 years away. Large pharma cos.have got hit big time with FDA, and we are just small fry. Our focus is success in unregulated markets. On that note, we are starting commercial production on the CP-IV plant in July-August (max) if not earlier.

7). It seems the co is utilizing the advance for huge capex. If something goes wrong, won’t the co land into liquidity crisis?

Ans. We have a defined market and we estimate that our production will easily meet demand. And since we are not too focused on taking debt, but funding this through internal accruals to maximum extent possible, liquidity crisis is a distant possibility.

8). What are the forex policies of the co? As the co is a net exporter, why did the co suffer forex loss last year when we had rupee depreciation?

Ans. You have to contact my CFO for that. What they tell me though is that the loss is only notional and has not impacted cashflows. But then again, my expertise is not in finance. So I defer the question to the CFO. To your question, yes, we are a net exporter and we donât have any artificial hedges â itâs just a natural hedge.

9). The co has been acquiring some cos in past and issuing eq shares? What has been the thought process on the same? Who are the majority shareholders and controllers of the co?

Ans. There are no further acquisitions on the anvil. My family and I are majority shareholders.

10). What is the dividend policy and how does the co intent to create value for minority shareholders?

Ans. The current dividend policy will continue. My understanding of how stock markets function and how dividends affect stock value is limited. I donât even know if buying Caplinâs shares for myself from the stock market is legal or not. I am eagerly looking for an Independent Director who will have the best interests of Caplin at heart, understands the pharma landscape and can help me with the stock markets and finance.

11). What are the growth prospects going ahead?

Ans. I am looking at 20% revenue growth this year and a significant increase in profits.

12). What is the status of CP-IV plant? The suggested completion date was Dec 2012. How has the progress been with manufacturing? How has the progress been with permissions from FDA and MHRA since the slated commercial production was May 2013?

Ans. Covered earlier.

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From the Chairman’s reply, seems like he is a good guy. His adversity to debt gives a better cushion from arshiya like situation. His following “small guy targeting smaller market” makes sense to me, pretty similar to we small investor targeting small not-so-much-researched-by-big-guy companies.

I can summarize this interview as

1). Expected growth rate - 20%,

2). Debt adverse, seemingly conservative management, with focus on ground, who knows what is his limitation (not a big player), what is his advantage/strength (especially having ground level staff, in smaller markets)

I think this interview lack answers to few questions

1). What is the expected growth rate for next 2-3 years (they give figure only for next year), expected increase decrease in profit margin

2). Worse case debt figure for 2-3 years, so worse case DE ratio

3). SWOT analysis

)–> what are the opportunities, how big are the opportunities

)–> what are the risks they see in coming future

)–> competitive landscape ??

4). What is their long term vision, say 4-5 year, what are they envisioning their company to be. What action-plan they have for the same.

As per my information from an ex-employee, caplin does not supply to Mexico and Brazil. It supplies to smaller countries in central america.

Kiran, Ayush, Kushal dalal, thanks for your analysis of the business or facilitating for the same. It is really commendable effort.

This company looks interesting. I could not spot the latest 2011-12 annual report, if any of the members have access to the same can you kindly give a link for it, thanks.

I think the questioning of Kiran is quite good. Some more questions that come to my mind are these :(if any of the members have answers you can post them for our benefit or can be posted to mgmt)

  1. There is information of Strike and close out of Pondicherry unit in the AR. It seems they are operating it partially. So are there plans to operate it fully and enhance it further ? If so by When? Information on what exactly was the problem there would also be beneficial

  2. There is qualification of Auditors stating there is scope for improvement of Inventory management. So what kind of improvements were made ?(Actually auditors were changed the very next year)

3)There is qualification of Auditors stating that no provision was made for debtors(from abroad) though they were due for over 5 years. So have these debts been collected by management ?(Actually auditors were changed the very next year)

4)Traded products seem to have more margins than manufactured products. Why not engage in whole-time trading than manufacturing ?

  1. Also questions regarding the exact generic compounds which they export, can help experts like Dr Hitesh to comment on the products further as well.

Thanks

Thanks Kiran, for taking the trouble. The Q&A gives a good feel but does not answer key things:

1). Advances - Sources of advance; why someone would pay advance for generic products: sustainability of same: are there no viable competition; why?

To get at that, we can probe as suggested before on markets, advance markets, competition

a) Which are your top markets? Does any one market contribute more than 30% of revenues? Any customer contributing more than 10% of Sales?

b) from which markets are you able to get Advances? Advance Terms?

b) What about Guatemala? Honduras? Are these among your top markets? what will be the total pharma market in these countries? Which are the other big players in these markets? Are they local or Indian players also?

c) When did you enter Mexico & Brazil markets? What’s the size of revenues there and what rate are you growing there?

etc etc. You can formulate properly along these guidelines.

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Also ask when you can get an emailed response from the CFO explaining Forex issues -Forex policies/Hedging; Losses, under what head (sales/Currency, M2M), what steps taken to mitigate such losses in future, etc.

-Donald

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@srinivasan : Unable to find the negative auditor comments. Which year annual report are you referring to?

I think the most important thing to look here is the cash flows - the co is having very low inventory, debtors and fixed assets…nor does it have any borrowing. This is something similar to the mayur balance sheet . The co has been paying taxes and also giving out good dividends and hence I feel the things must be true.

Yeah, we do need to figure out if the advances are sustainable for a longer period and if Yes, then why? Anyways, rather than banking on this factor, the important thing is that if these advances are there then the co should be able to complete the 75 Cr CAPEX easily without much pressure and if successful, it would take the co to next level.

Anyone from the pharma sector who can help us in understanding things better?

Ayush

Ayush,

As always thankful for your replies. As you state there is a lot of positives, making this co. study worthy. The point I make may not be deal breakers, but still we can discuss or put forward for further study. Please refer AR_2008-2009 (page 26, 27,28 italizied comments)

(i) I would also like to know your opinion for non-provision of debts even when they are due over 5 years.

(ii) This auditor was changed and new auditor from next year onwards. No big deal, but I liked this auditor for their qualifying comments.

(iii) Any info on full utilization of Pondicherry unit. There still seems some settlement issue with employees over there and unit not fully operational ?

(iv) Your opinion on trading of goods producing more revenues than manufactured goods. Also seems to have more margin in trading. May be purchased from the amalgamated firm.??

(V) Pharma expert Hitesh can answer your query on growth to next level. They do have certain interesting products for Hitesh to look at :

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

Disc: no positions yet.

Wow guys what a detailed analysis. Hats-off to all of you. If anyone plans on visiting chennai, pls let me know would like to accompany, I am from Erode.

The company doesnt have a brand or moat. One competitive advantage the company has is of own marketing and distribution team, seems like company is not inclined towards R&D and branding, which could be a real game changer.

Without R&D and branding a lot of emphasise stays on the pricing/cost. If cost escalates for any reason it can turn into a mishap. That seems to be the biggest negative.

One question we did miss was “Does company has any patents??”

Krishna

Ayush has been stressing on the consistent improvement shown by the Company in last 5 years on all fronts (especially the last 3), along with Sales/Profit Growth,. (He mentioned Mayur like consistent improvement in BS/efficiency!)

So I decided to use Screener.in Excel Customisation feature to see for myself how good that picture really was.

CAPLIN POINT LABORATORIES

FY 2012 FY 2011 FY 2010 FY 2009 FY2008
Debt/Equity 0.20 0.38 0.48 0.43 0.69
Working Capital/Sales 0.78% 18.05% 23.39% 21.90% 23.79%
Debtor Days 25 35 55 53 69
Inventory Days 19 24 25 46 36
Cash In/Out Ratio* 0.20 0.40 0.60 0.61 0.82
EBITDA Margin 11.96% 13.20% 9.96% 10.69% 7.48%
Net Margin 7.61% 8.18% 5.52% 3.66% 1.65%
Capital Turnover 4.03 2.35 1.95 2.14 2.20
Fixed Asset Turns 4.16 4.10 3.57 4.02 4.61
Asset Turns 2.64 2.26 1.88 2.12 2.19
RoA 20.09% 18.51% 10.38% 7.77% 3.60%
RoE 24.08% 25.55% 15.35% 11.08% 6.58%
RoCE 28.72% 23.43% 12.22% 15.68% 8.44%
RoIC 33.10% 18.15% 11.24% 11.15% 3.97%

* Cash In/Out Ratio - checks for (Debtors & Inventories)/(Current Liabilities) - Cash coming in vs Cash going out. The lesser the Ratio the better, implies you are taking in cash must faster but giving out Cash much slower

Must saythese data points are truly impressive!Infact they seem to good to be true!!

Caution: This is a very small company, playing in Generics products in markets of miniscule size. They do seem to have some competitive advantages in these markets (We need to find the whys), but the moment they step out to bigger markets the odds are on that the playing field will get levelled.

Just for the record, again.

1. Working Capital/Sales - dramatically reduced (largely due to growing advances)

2. Debtor days - less than half over 5 years

3. Inventory - almost halved over 5 years

4. Capital Turnover - almost doubling

5. Asset Turns - gradual improvement

6. Margins - Big improvements in Operating & Net Margins

7. Debt Levels - less than 1/3rd in 5 years

Am astounded! Hope I haven't got some data wrong. Ayush please check!

2 Likes

@srinivasan : Hey, thanks for the details. I went through the past 4-5 yr annual reports and I don’t think the debtor and inventory point is concerning because:

Both inventory and debtors had reduced to very low levels despite increase in turnover. I mean 4-5 Cr of inventory and debtors in minimum for such kind of turnovers. Infact in FY 09 AR, the mgmt has talked about provision for poor inventory and debtors. They did provide for some amounts in the P/L.

On the margins more on trading - it may be possible as they are importing key APIs etc from China and all. There main competency is product basket and registration in some markets.

@Donald : Sir, finally you got interested :slight_smile: Yes, the data is correct and this is the beauty of this co - they have been having negative working capital now. The improvement in ratios and been steady and dramatic over last 5 years. The key thing to understand is the future outlook and the sustainability going forward. Having presence in such small and un-regulated markets must be having its own risks too.

Ayush

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Any idea on exact product range of the com pany,size of opportunity n back up plan for the main promoter?

First things first )- Screener.in Excel Export/Customisation/Upload feature is sooo amazing! Till today I didn’t know that if I upload back one Excel spreadsheet after personalising the Customisation Sheet (with my pet formula template), then next time whenever I Export Excel for any other company, the Customisation Sheet will be populated automatically using my own Personalised Template.

I guess, I just didn’t pay enough attention when Ayush/Pratyush explained the Customisation feature to me.

This is a great convenience - very well thought out/ultimate personalised service. Now I can have a first good look at any stock idea I want in a jiffy, just the way I am comfortable looking at the numbers. It just takes a minute now for any stock. Sun Pharma, Nestle, ITC - Standalone/Consolidated - whatever you may want - is on the Menu:))and served with all the Love, no Charge!

Not sure everyone is aware/using this in the way intended. If you haven’t, please do it NOW. It’s such a great time-saver!! Takes so much headache away!! Zillion thanks to Pratyush/Ayush.

-Donald

Ayush, Donald thanks for your views.

Yes I also want to thank Pratyush, Ayush for Screener.in, & get interested in Caplin Point Labs. I don’t even have a grab on querying on the screener let alone customizing and uploading excels. Need to do some practise. Excellent tools for those who can master it and use it effectively likes of Donald.

Caplin Point Lab business is no Mayur uniquoter for me, which is extremely simple and less risky business. As Ayush, Donald says Caplin is improving its return and ratios. From pathetic business returns 5 yrs back to very respectable returns. Now I know why market rated it so poorly then. The near term growth visibility is the factor that is tilting investment argument in its favour. Can we say this business is turning around or scaling up ? Stock quoting may be 9 P/E forward. As Ayush says, “taking a small position to track it” is how I see it. Pharma companies with local visible products are already languishing for past 3 years giving very moderate returns, is what making me skeptical of pharma businesses. Also Caplin point not having any noteworthy local market is also not very encouraging. Annual Report talks about Aid agencies also as their clients. We can also check who those aid agencies and for what products they pay for. During economic downturns aid agencies reduce their product demands due to lack of aid it seems.

So far so good. Great improvements. But that shouldn’t lead us to believe the next 2-3 years will be as hunky dory. What is the Visibility on that?

What I would like to know/understand more about, therefore:

1). Their specific markets. Reason for the dominance and hence Advance from Distributors from such markets? Will these be sustainable? Why?

2). What kind of penetration do they have in these markets? Is there enough room to grow in these markets at 20% plus? Or they will have to draw from newly entered/planning to enter markets like Peru/Mexico/Brazil -to be able to grow at 20% plus?

3). Where will future growth come from?

4). Why do they think they will make a success of larger markets like Mexico & Brazil? Aren’t there bigger players in these markets specifically?

5). What kind of registrations are required for Injectibles? Have they already started the process of registration for these? Where, which markets?

-Donald

PS: Time to study all back issues of ARs

The growth will come from the fresh Capex, this increases their product range by a great margin. Also the mgmnt says the new products are high margin business, so this is where the growth & profit will come from.

With increased sales pressure very good chances that they might have to extend credit so rather than advances the debtors can increase, so this negative market cap will be hard to sustain.

The very reason the company is in lower markets is because of the hassels in Europe and other developed countries. So approval is something that must have been taken care of, but no harm asking that directly from the company.

The reason for Advances is mentioned in the con-call

"4.Co has been getting advances from customers. How and why? Usually other cos have high debtors while working in these countries.Is it brand? If yes, please share details. What are the terms of such advances…are they recallable?

Ans. The suite and range of products that we provide are a must-have for distributors. Distributors give advances since we give priority to distributors who give advances. If you look at our Balance Sheet over the past few years, there have been customer advances consistently. These customer advances are definitely sustainable and as long as we supply our products, there are no problems with re-callable."

Lrishna.

there was a link for the company’s products in an earlier post.Although iam not a doctor,cant believe somebody is paying advances for that kind of stuff.Maybe Guatemala,nicargua etc are countries that everbody else has just overlooked/doesnt seem attractive(most of them are poor) …Brazil and Mexico are not small markets with lot of guys around,and not easy for them to make a mark.I have my doubts on the scalabilty given the products they have.

Maybe one of us(spanish speaking) has to go to Guatemala .

I looked for some of the employees of Caplin Point on FB . Found them to be stationed in some exotic places like Guatemala, Angola, etc but educational qualification wise n experience wise a very average profile. Need to scuttlebutt more n find out more abt the company.

Company has stated in AR, that they do not come under Drug price control, since they do not sell locally at all. This was one big statement for me.

One question to ask could be "Any plans to sell products locally in India and scale up Indian sales also "

Because the product range seems to be exhaustive, why not sell in India also. Margins may be small but volumes could be huge. Many much smaller players are already selling profitably here in India, why can’t Caplin ? This can increase their brand equity and also visibility or credibility. May be 20 :80 in favour of exports atleast could itself create big visibility/credibility. I presume Our market should be one of the loosely regulated in the world.

I would like to take an excerpt from the con-call

"

1.The co has scaled up well over last 10 years, However the growth over last 5 yrs has been steady at about 20%. Kindly take us through your journey. Business model, kind of products, distribution method etc. What were the major challenges during this time and how did the co overcome them?

Ans. Part of the answer above, in terms of personal background information. Also, in the early years of business, there was a lot of talent attrition since we couldnât match salaries. However, the Chairman hired people from his town/village, trained them in Spanish and placed them in Central and South America (and hence, loyalty is high)."

So we will not find highly educated or experienced guys in those places. It matches with what the mgmt says.

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Also as pointed out in con-call the company has first mover advantage in their markets, so why look at Indian Markets? May be the price/profit realisation from both the indian & Intl markets is the same but still in India they will have to extend credit but from overseas they are receiving advances.

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Also the people placed overseas are just like field trip boys. To gain trust of the distributors. One of the reasons why distributors would prefer caplin over other companies.