IMO, we should not give much importance to price fluctuations as it already gave huge returns, so many may wish to book profit, so fluctuations possible as there is no such thing visible, I will chose to take decision on something solid not on rumour. But as u invested 25% of portfolio you need to think on every aspect now. Sorry me new here if I made any mistake.
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Dear Ranjan,
My two pennies:
You have to follow the performance on a structural basis and longer term basis.
Each data point should not be acted upon. Yes one can get nervous wen there is relentless selling, but we have to learn to cut out the noise and look at the business quality to decide if we want to continue to stay invested.
You have to take cue from management integrity, focus on margins, business expansion, operating cash flows, financial health etc.
Are you spooked (inspite of the fact that you like the company) because you have a concentrated position (did you buy this higher than CMP?) - would you be as nervous if this stock was say 5 percent of your holding?
@Rokrdude posted a wonderful tweet highlighting the risk of holding a concentrated position - Aman I really appreciated this insightful link.
@nishantkandoi - we spoke about risk of concentrated positions while discussing your portfolio too - this will be of interest to you too. (apologies for dragging you to this thread - but trust you will like this)
http://csinvesting.org/wp-content/uploads/2016/03/The-Agony-and-the-Estacsy-of-Stock-Picking.pdf
All the best!
Aniket.
6 Likes
The stock at the current price of Rs263 trades at FY16 trailing P/E multiples of 18.3x. Company should do assured sales of Rs772cr in FY17E. If I extrapolate that it implies FY17E EPS of Rs17 which is 15.5x FY18E P/E. Which is quite cheap for a company with 53% RoE in FY16 and 21crs of cash and no debt end Jun16 which almost 7% of market cap.
Disclosure: Invested
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Assuming the promoter is willing and if the diversification plays out well, does no one see Cupid as a good FMCG buy-out candidate? Especially if Mr Garg is unable to find a suitable replacement for himself.
Just wondering how trading in such low liquid stocks happen. Experts may pitch in. Looking at the trend, looks like somebody could manipulate the price by selling at low quantities over a few days to buy in bulk at a latter point of time. Innocent panicky investors are expected to fall prey to such manipulations.
Irrespective of what happens, steady state price is a function of company performance. Teaches that an additional MOS must be embedded into the pricing of such stocks to account for low volumes of trades.
Sitting on my watchlist of good businesses, the steep correction in Cupid has made me sit-up and observe this company more closely. Don’t think I have much more value to add given the comprehensive and in-depth analysis of fellow VPs - so learned VPs with sound conviction on Cupid may ignore this post 
After studying the company financials and management quality - there really is no major parameter on which I could fault it and it ticked 17 out of the 18 boxes on my investment checklist (doesn’t include valuation). This company seems to pretty much have it all - from a very easy to understand business model (delivering great numbers - Revenue/PAT/margin growth over past 15-18 months and excellent RoE and RoCEs based on asset-light business) based on a type of business that is continuing since generations/centuries to an honest and capable (albeit ageing) promoter with rapidly improving (I’d say excellent now) corporate governance with great disclosures.
The order book FY18 onwards seems to be the major risk/concern (may be raw material costs as well but everybody seems to agree that it’s going to be rangebound) at the moment - valid concern IMHO but if everything was crystal clear, this correction won’t be happening in the first place! However, I take plenty of solace from the fact that Mr. Garg has repeatedly managed to deliver on the business outlook promised and consistently seems to be under-promising and over-delivering especially on PAT growth.
Now coming to valuations, for a micro-cap sub 300 cr company promising 15-20% revenue and PAT growth with little revenue visibility after 8-10 months, - the market really can’t justify 35+ type P/Es IMHO and I’ve happily (perhaps unhappily as well when Rajeev ji introduced this 1 year back at 70 odd levels 
, but then promoter pledging, corporate disclosures, earnings calls, dividend, etc. so many things were unclear/different) stayed out keeping this on my watchlist.
Given that it’s now trading 17 times TTM earnings, >1% div yield and EV/EBITDA of 11.5 - seriously considering pulling the trigger on this. Ideal valuation with good MoS around 15 times TTM for me - so will probably wait some more.
Also let me try to give a shot at the technicals (no expert so please use your own judgment) - till the time the 100 day EMA is above the 200 day EMA, I don’t foresee major downside risk from these levels, shouldn’t be more than 5-10%. I also see good support around 240 levels with a double bottom in my opinion. However, if the 100 day EMA were to fall below the 200 day EMA, levels close to 200 are a distinct possibility but it has a solid consolidation base at those levels. Overall, purely on technicals - it shouldn’t fall more than 20% from here (which is already a lot given it’s highs of 500+)
Disclosure - Not invested yet. Losing sleep thinking over it but probably going to stick to good MoS principles
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Interim dividend declared by Cupid
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=79674370-2d8e-4b4c-aca5-7345b395649d
Good to see this. Hope this coverage translates into more visibility and orders for Cupid while NSE continues to mull over should they list Asia’s best under a billion and BSE continues to force a 2% limit!
Investor Meet with Unifi Capital
http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/07A8A73D_CE8D_4670_B972_DE06D72F871A_152658.pdf
I think cupid circuit limits have been increased to +/- 5%
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Yes. You are right.
But the official notification regarding the same could not be found on the BSE website.
Bse Website cupid offer/Bid page shows 5% band info. It is official.
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Ok. Thanks.
What I was pointing to., was the notification issued by BSE to investors in this regards.
Hi, did anyone get the chance to attend the recent analyst meet? Would be great if some one posted key takeaways
Hi Aniket - will post inputs today.
Best regards…
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Disclaimer: This note does not cover all interactions on Friday. I may have missed some inputs. Have consolidated salient inputs / data hereunder:
Cupid Analyst Meet
Highlights from the visit:
Shopfloor Visit:
We were split in groups of 5 - allowing focused interaction - and had a one hour shop floor visit with a technician.
Layout of the factory was optimised for smooth material flow and available space was used optimally.
Production process for M.C. / F.C.:
Attrition Milling - Chemicals required to be mixed with Latex are ground and mixed to form a paste.
Compounding - Mixing of latex with chemicals.
Storage - Post Compounding, storage for 4 days to aid vulcanisation / strengthening the rubber bonds.
Forming and Drying - The compound slurry is placed in a tank in a condom forming machine where metal moulds dip into the compound and proceed for drying. The process is repeated to build the required thickness of the condom. These machines are run 24 x 7.
Post drying the condoms roll off the mandrels.
Tumbling - Subsequently, the condoms are put in a tumbler where they are mixed with talc in order to stop the rubber from sticking to itself.
The processes for additional inserts to condoms (ring, foam etc) and packaging needs dedicated and efficient manpower.
Automated systems are expensive and inefficient - due to the material chemistry, required dexterity for handling, as well as presence of talc that can clog sensors, relays and valves automated systems will have repeated failures.
To my mind, there is some scope for automation in final packaging, however this will depend on cost and availability of labour.
Each condom is tested on a stainless steel mandrel. A soft conductive brush passes over the mandrel and if pin holes are present circuit is established and the condom is rejected. Newer machines are double station allowing better space utilisation / double output for number of pcs tested in similar floor area.
Additional test equipment in the lab to test elasticity and strength of condoms where random samples from batches are tested was also shown.
Production Equipment consist of Attrition Mills, Stainless Steel Tanks and Stirrers, Condom forming machine, Raw Material driers, Testing equipment on shop floor and in lab.
All shop floor equipment are industrial standard and rugged, they need only routine annual preventive maintenance.
Older Korean lines had some special features which had some pros and cons, while newer lines have slightly different handling and processes for output.
PRODUCTION OF WATER BASED LUBRICANT:
Simple process consisting of blending of ingredients followed by packaging.
After an hour of communication with the technician who showed us around the factory - we had been communicating off and on in Marathi - our mother tongue. He had opened up quite well, and I asked him how was the experience of working at Cupid and how he would rate his employers. His comment was that they were task masters but fair and good employers.
While walking through the entire factory, all workers were totally focused and occupied on inline tasks on hand. While this observation does not differentiate good and average companies, in factories where labour tends to be problematic or where there is dissent / poor work environment, the energy on shop floor is different, body language of people is poor, feedback to queries lacks any enthusiasm and one can also at times see groups of people whiling away time. At the Cupid factory there were no such red flags.
Management Q&A Feedback:
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Mr. Garg spoke about bad times between 2008 - 2010 when Cupid was dependent on Government of India for M.C. orders. They doubled capacity, and G.O.I. orders dropped - financials deteriorated. After that Cupid have consciously changed strategy and moved to diversify products and their customer base.
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For M.C.'s Cupid are consciously trying to create alternatives with ribs, unique contours for more penile comfort and pleasure, as well as adding new flavours in order to push current EBITDA higher.
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Global Condom market is 27 billion USD expected to grow @ 9.3% CAGR through 2020.
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Mr. Garg reiterated projections for F.C. demand to quadruple to 320 to 350 mn units by 2020 - F.C.
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Spending will be driven by the Sub-Saharan (African) region (18 countries) where spread of HIV continues to be high and prevention of HIV will be a key priority and trigger for F.C. Cupid is completely focused on these areas for future growth. FHC, the current world leader also considers that Zika virus in addition to HIV may be an important trigger for sustained growth of F.C.'s.
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Next tender from South Africa for 2018 - 2021 is supposed to have robust increase of about 50% in value. Cupid is very positive on Africa and Mr. Garg is confident of dominant market share in the next tender. The FHC concall transcript provided a point of concern (Page 7) where FHC claimed that they were asked if they would provide Education and training for Cupid’s product. I spoke one on one with Mr. Garg about this issue and he was emphatic to rubbish the claim of FHC calling it a face saving measure, and firmly stating that Cupid Distributor is providing required training and education, and that the reality will be seen with the next tender allocation.
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Cupid are also looking at growing business in Latin America and Eastern Europe. They plan some special incentive based launches.
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Safeway order from the US was cancelled, because the company did not have the financial capability to source product from Cupid.
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USAID is expected to come up with a 1.2 billion USD tender next month for several items including M.C. and F.C. As disclosed earlier Cupid is not qualified for F.C. with USFDA however they can sell M.C.'s. As per FHC concall transcript the USAID Procurement budget for MC and FC may be 335 Mn. USD.
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One analyst asked why we couldnt make progress in Brazil. Mr. Garg responded that inspite of being L1 for a 40 million F.C. tender the supply was awarded to FHC. After much followup as to why Cupid lost the order, they were informed that this was because Cupid did not have a long track record of supply of F.C.'s. Mr. Garg also mentioned that new tenders are unlikely out of Brazil due to poor fiscal situation.
The FHC concall transcript states as follows:
The 40 mill. FC2 order was shipped out in Q2 2015, and receivables from Brazil net of dues to distributor to FHC continue to be 13.4 million USD! If you see the FHC commentary in the transcript they are jittery about receiving this payment and link it to release of a new tender!
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Government of India is expected to raise a tender for 344 mn M.C.'s this year and if the fiscal situation stays good, then their order flow may continue. G.O.I. raises annual tenders.
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Cupid1 condom weighs 3.8 gms (incl. 25 mm medical grade foam), Cupid 2 weighs 3.6 gms (incl. 12 to 13 mm medical grade foam), Cupid 3 will be without medical grade foam with conventional ring attachment - this latest development is based on feedback from their African visit where distributor requested this product also be made available to address existing market for consumption which requests such design.
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The new F.C. line doubling current capacity will be installed at a higher floor level which will need to be constructed. No firm timeline but depending on order flow. Lead time for equipment is 6 to 7 months and commissioning is 3 to 4 weeks. Total capex for equipment and factory construction indicated to be 7 crores.
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Water based lubricant production commencing at full steam. Capacity 210 million sachets per year. Capex of 3 crores INR to achieve a capacity of 7.5 crores INR topline at 30 to 35% EBITDA. Garg indicated that these are early days and they are leaning more about the demand for this product. There seems to be very good scope for this product, which is complementary to the current range and their existing distributor is UK is currently selling it. Company is also launching own Cupid Brand Water Based Lubricant.
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Key risks to business to Mr. Garg’s mind are a dry up to funding by organisations / governments for sponsored programs (unlikely in near future due to the need to control HIV / Zika) as well as any unanticipated spike in Latex prices which have been range bound between 80 to 120 Rupees over the past 5 years.
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Cupid spoke about their emergence as a good supplier due to the value proposition they bring to the table namely:
Cost reduction
Timely delivery
Custom packaging to meet specific requirements. -
It is important to note that Mr. Garg mentioned that in a recent tender they have been underquoted by a Malaysian company. This is a first instance.
However due to a delivery commitment of 3 weeks by Cupid as against 3 months by competitor the tender was awarded to Cupid. (Not sure if this was mentioned for a FC or MC Tender)
To my mind, however, such incident could be the reason Mr. Garg has spoken about realistically moderating margin expectation to 50 - 55% for F.C. as against earlier higher estimates (55 to 65%), and spoken about improvements to efficiency to reduce costs and offset any pressures on margin. -
Of the current pending order of 56 crores, 29 crores are for F.C. and 27 crores are for M.C.
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Cupid aims to maintain margins between a broad range of 35 to 43%
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NSE Listing - Mr Garg informed us that a few weeks ago they got a surprise visit from 2 officials of the NSE. They had come to see if “there was really a factory”. They spent at day at Cupid and have gone back to submit the required report. NSE had informed Cupid that while all required documentation from Cupid was in place, they were waiting for positive developments from BSE. On Friday, after BSE raised Cupid’s circuit limit to 5% Cupid have written to NSE again, indicating this development, and Mr. Garg stated that he was hopeful of early resolution.
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Marketing B2C initiative - Online sales though miniscule, condoms have been delivered to 143 locations in India. The Idea for the current year is to use existing company resources and spend about 3 to 4 crores on targeted initiatives, assess the impact and then consider a more mainstream launch next year.
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Succession - Continue search for suitable CEO. As per Mr. Garg, Team Cupid are well versed in their roles, relationships with key customers are either developed or being developed well, and objective for the coming years are very clear for the team.
Conclusion:
Very Satisfied with the interaction and reassured after visiting the setup.
Link to FHC Transcript:
FHC faces significant challenges in the future, and is merging with a pharma company to secure its survival.
Best regards,
Aniket.
39 Likes
Annual report is out for Cupid.
Basant Maheshwari holds 1% in the company.
I have read through most of the posts in this page and I have a couple of quick questions.
- What is the moat in this business? I agree that condoms are a sticky business
. But Is it very hard for a bigger player to enter into this market and replicate what cupid are doing? - As previously asked by @varadharajanr who were the competitors that Cupid replaced?
. But Is it very hard for a bigger player to enter into this market and replicate what cupid are doing?Disc : Not invested but interested