Great question @krkarthikeyan! It looks like you’ve done quite a bit of research on this. Would love to see your valuation model, if you can share it with us?
Its great to see interest and investment by one of the world’s largest growth PE investor, TA Associates in Shilpa - its a big stamp of quality.
Some interesting facts about TA Associates -
- Founded in 1968, has raised over $24 billion; currently actively managing $7 billion
- It is amongst the 50 largest PE funds globally
- Offices in Boston, Silicon Valley, London, Mumbai and Hong Kong
- Has a good track record in India- Invested in Idea Cellular Dr Lal Path Labs, Fractal Analytics, TCNS Clothing (W), Micromax - all of which have scaled up rapidly
- Globally has made a large # of blockbuster investments (both buyouts and growth)
Recently, I was evaluating Shilpa for fresh investments. however felt uncomfortable due to two types of Risks.
Earnings Concentration Risk - (half of the FY19 earnings are dependent on two USFDA approved plants) - As per my estimates, US business will contribute almost half of the Shilpa’s earnings in FY19. As per Biennial frequency, API and Formulation plant FDA audit will be due in Jan’18 and Sep’18 respectively. Any FDA issues like serious 483s observations or import alert with any of the Raichur (API) or Jadcherla (Formulation) plant can create a serious damage to future sales for at least 1.5 - 2 years or longer. As they don’t run a multiple plants hence they don’t have luxury to shift the manufacturing to other USFDA approved plants to continue the sales of high margin, high volume drugs. USFDA non-compliance used to be in procedural nature and USFDA puts the whole plant under observation rather than a single unit or block. Further, they have limited experience of handling the USFDA compliance in full fledged running condition; keeping in mind the seasoned players like Redddy’s, Sun, Cadila have faced the non-compliance issues several times in the past.
Valuation Risk - As the present valuation of Shilpa factors in the FY19 earnings; which is majorly contributed by US Sales and PAT. Considering the FDA Audit which is due in 1HFY19 is a big overhang before the party actually starts. Any serious USFDA issues can pull the valuation down to the non-US earnings level.
Considering the potential downside, the present risk-reward is not in favor of the investors. I might be completely wrong in my understanding. Views invited.
Disclosure - Invested
Good analysis @Alok81. I have this query, I hope you won’t mind discussing.
Just one simple question, if something doesn’t qualify for incremental investment at Rs X how come you are comfortable holding on to your existing position here ?
I do not agree to the notion that you bought something at 50 and which is now at 200 and hence you have enough margin of safety on your invested capital. 200 is your current capital allocation and if it is not fit for incremental allocation, one should take out the 200 as well.
it may be very interesting to read this recent article of Prof Bakshi on the point you have raised…
Shilpa results out http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/2192DDB6_2AEB_430E_B8A2_DE4E122F9091_135452.pdf
Paid up capital goes from 771.02 to 801.27
Bad results. Seems Q3FY17 does not reflect any of the profit share of Azacitidine (US FDA Oct '16), Imatinib (UK MHRA Nov '16) and Capecitabine (US FDA Dec '16) sold by their partners and/or subsidiary. Hopefully Q4FY17 is when we will see effect of the above approvals.
Of course! what more can an investor can ask for
They had allotted shares to the new PE Guy
India Nivesh take on Q3 Results
Shilpa Medicare (SLPA IN) reported numbers far less than our estimates on all counts due to delay in revenue from Formulations. We believe SLPA is on the path to strong growth from US oncology business both in API as well as Formulation over next couple of years & that the company is at the point of transition to next orbit of growth. The approvals from US shall be critical & steady ramp up in US business will be key driver of growth. In our view FY18E is likely to be a block buster year for the company & strong growth is likely to be maintained over FY19E & FY20E when benefit of large pipeline of formulation products is likely to play out. At CMP of Rs 667 SLPA is trading at 53x FY17E/ 35xFY18E & 21xFY19E EPS of Rs 12.5/Rs 19/Rs 31.8 respectively. Since the upside from CMP is limited we downgrade our rating from Buy to HOLD with price target of Rs 731 valuing it at 23xFY19E (target rolled over from FY18E to FY19E PE multiple unchanged).
In our Q2FY17 post result note, we mentioned that Q3FY17E is likely to be better than previous quarters as both the shutdown lines are fully operational hence revenue from exhibit batches (which had gone substantially lower) would come back. However according to management they had taken a conscious call to sacrifice near term revenue from developmental activities for long term gain from filings of own ANDAs, preparing exhibit batches etc & preparation of launch quantities of Azacitidine & Capacitabine. Hence development revenue in Q3FY17 was much lower than previous quarters. We had expected sales of Imatinib to EU to start partly in Q3FY17. However due to procedural delays in getting required approvals for shipments the company could not sell Imatinib to EU. However according to management they have now started some shipments of the same & expect partial sales to reflect in Q4FY17E &good ramp up to reflect from Q1FY18E. In our estimates for Q3FY17, we had assumed all the above factors leading to expectation of high growth on all counts. However due to miss on top line as stated above, reported numbers are far less than our estimates. We believe this is temporary blip as the revenue recognition has just slipped over to next quarter but business remains intact. We believe Q4FY17E/Q1FY8E onwards financials of the company shall improve significantly on back of launch of 2 above mentioned products. We wish to highlight that SLPA has already settled litigation with patent holder for Gleevac in US & is likely to launch it in April 2018.
Though I am digressing a little from topic ‘SHILPA’ stock, but just thought of sharing very interesting mail exchanges i had with one of my friend on this ‘stock hold but not buy new - paradox’, where in i attached Professor’s referred article in that mail…
me: I was referring to this article
Friend:On a lighter note, I was mulling over the thought and in the process tried to equate holding-buying paradox with separating and remarrying the same spouse every day. While the first one presents itself more as a paradox, I feel the latter one is easier to dissect and that is when you realize that there are more reasons to hold on to the same stock without a break even after we have had our fair justification for the extra time and effort invested.
me: True. Very meaningful analogy.
At this age, we both partner may not marry each other if we were unmarried.
But having already married and gained lots of benefit (hopefully!) from that relation so far, I do not want to untie that relation and go elsewhere.
Optimal benefit one gets by holding that relation and contributing meaningfully as much as possible for the rest of the time unless there is negative return thereafter.
Diminishing return after tasting huge and heavy initial return are OK. Why? BECAUSE IT IS MY WIFE AND MY LIFE AND SO IT IS MY DECISION!
it is ur own decision. But logically, one shd not marry his/her stocks. Rationale investors only work based on mathematical reasoning not based on emotions. Emotions shd be for family, friends not for stocks!
Yes, Truth lies some where inbetween…
taking forward that discussion on marriage or stock, we need to understand what is ignorable and what’s not. This is what Benjamin trying to convey. In case of Shilpa, the valuation and USFDA Audit is a non-ignorable factor for fresh buying. The USFDA audit, at every alternate year is a gr8 Joker which can make or break at this level.
Shilpa Medicare Ltd has informed BSE that there was an incident of fire
at the Company’s EOU Unit (API) plant In one block of the Company,
situated at Raichur, Karnataka. It is further intimated that it may not
have impact on the operations of the said plant or financials.
Since they have mentioned ‘may not have impact’ instead of ‘will not have impact’, I believe that this would only be a rough estimation and they need more time to assess in detail.
Yeah perspectives matter and often the decision making and patterns change with time and size of capital. Pulling out of a 10% position and to reinvest in a completely new one (which looks promising but hitherto un-tracked and un-tested) might be easier for smaller portfolios of xx lakhs.
However, when people have made real money in the market and portfolios have moved to xx to xxx Crs then decision making shifts somewhat towards protection of capital too. And moving out from a tried and tested story, with honest management and known variables/sources to track; where one is comfortable to a new story becomes a bit difficult. Here also transition if necessitated would be critical but would pan out gradually untill one is equally conversant with the replacement candidate too. Hence in these cases, choice is pretty easy.
One might start putting all incremental capital in the new candidate (the BUY decision) while continuing to reduce the old position very slowly (the HOLD decision).