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.