Some pointers on the CIDIC deal:
- CIDIC pays within very short time. So receivables days will fall and less working capital will be blocked for this capital starved company.
I am sure, though I do not know officially, that CIDIC will get the API at very good prices from Lasa.
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Lasa, in turn, may procure raw material from CIDIC (if the API is called N, the earlier stage product is called N-1 and given the multi stage production, raw material might even be N-7 or N-8). CIDIC apparently can give a very long payable time, up to a year, as per Lasa, which I personally do not believe. Possibly, CIDIC may charge a higher rate for their supply if they give such a long payment time.
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Regarding formulations, there is a misconception in the market. Formulations is not branding; it is just packaging the API in a tablet or other consumable form.
Normally, an API is a chemical powder stored in drums. I saw a large number of packaged drums in Lasa warehouse, ready for dispatch, for example.
Formulations involve mixing the powder with excipients, stabilisers, anti caking agents, anti hygroscopic coatings, tablet substrates, capsules, etc depending on the end product.
Paracetamol powder is an API.
Paracetamol tablets is a formulation made from the API.
Crocin is a brand made from the formulation. So post-formulation, it is only packaging and marketing. No chemical process is involved.
Lasa is planning to enter formulations, not branding, which is a different beast altogethee.
Lasa also makes some formulations, whether they claim it or not. For example, I saw drums of Halquinol 60 ready for dispatch, at Lasa Mahad, which actually contains Halquinol mixed with Calcium Carbonate (chalk powder) and other things in 60:40 proportion.
Incidentally, that is a marginally profitable business because Halquinol is 1050 per kg and Halquinol 60 sells for Rs 650 per kg. If you take Rs 120 per kg for Calcium Carbonate, you can make Halquinol 60 in 0.6 x 1050 Halquinol plus 0.4 x 120 Calcium Carbonate = Rs 678 per kg. So I don’t think one can make more money in such a formulation but it gives you end user connect as Halquinol 60 is directly used in Chicken feed (Calcium added for stronger egg shells).
So for Lasa, I think, formulations is a way to capture their own API and end user demand. Forward integration.
- Regarding EBIDTA in formulations, this is how I broadly calculate:
EBIDTA for API: 22%
So non-EBIDTA for API: 78%
EBIDTA for formulations: 10% (normally)
Non-EBIDTA for formulations: 90%
So non-EBIDTA for API plus formulations:
78% x 90% = 70.2%
So EBIDTA for API plus formulations:
29.8%
In effect, going for formulations will confer two advantages to Lasa:
A) Higher EBIDTA
B) Usage for its own API.
Usually, govt and other end-user (milk cooperatives) tenders are for formulations and not API.
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I like the CIDIC deal. Typically, such deals would be a commitment to buy 20-50 crore of API every year for 5 years. I do not know the size of this deal but I like the 5 year commitment part. Such deals are rarely signed without a plant inspection from the company. So something must be acceptable there.
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By mistake, I went to Mahad MIDC for their EGM a day before the actual date. Realising my mistake, I asked to meet the plant manager for a plant visit. I was told that he was tied up with external auditors, I think from Novartis. Apparently, Glaxo, Novartis, Merck routinely conduct audit visits of their plants.
So those of you, who like to do independent scuttlebutt, may wish to find out from the above companies what their audit typically throws up.
serious doubt on management capability will be proven right if only the Q4 results are not as per guidence… i.e. ~ 22%+ margins and 60 crs + topline.