RsKm - Please continue to post. Your contribution is valued, just as every other members. Meanwhile, if there has been any offense taken by you - I apologise. I will surely meet you next when I am in Mumbai!
However, please do not expect me (for that matter anyone else) to rebut on everything/anything that you write. I reserve my right to choose what I will comment on and what I won’t - especially as Caplin is a closed chapter for me.
One last time, let me lay out why so - for your and everyone else’s benefit - who is unable to read between the lines
1). Products vs Margins
The first big red flag. They just don’t add up. No one in the world manufacturing analgesics, anti-pyretics, antacids, antibiotics - generics (non-branded) - a hugely fragemented & competitive market - can have such nice margins! Last I had seen trailing OPM was trending 15%.
Just this much is good enough for a “refined” investor like Hitesh Patel to stay off saying he doesn’t understand this business. Please THINK about this aspect!
But I get excited when I see improving trends in numbers - so I continued to ignore this crucial bit, but tried to understand more why the numbers are so encouraging - how debt has kept coming down, how working capital/sales is getting to less than 5% to near zero!, how cash flows are zooming! etc.
2). Advances - 40-45 Cr - Capex 70 Cr for injectibles -
Now this was the mouth-watering part for us - still number-focused chaps. Wow! if this is sustainable, then this business has some X-factor. I kept telling Ayush and others who had talked to Caplin Point that we should go and meet these guys to understand more.
However - as we tried to understand the sources and sustainability of advances, I found another Red Flag. Different folks talking to Caplin had different versions to put forward. A normal stockpicker who was given 1.5 to 2 hours on the phone told me the main markets are Mexico and Brazil . However an Institutional friend from Chennai who went over to meet was told about 7 countries and only 3 countries really contributed to advances
Why should different guys get different versions. The guy with more homework is given proper details - since he quizzed about Caplin’s market presence in small LatAm or African markets with 200-300 Cr annual market size! Un-regulated or semi-regulated markets with some need for registration but (mostly) no national FDA compliance requirements, etc. But the guy asking open-ended questions is glossed over with Mexico Brazil type answers - where perhaps registrations are in progress, as the main markets!
Another big red flag for me!
As we now know advances are not sustainable beyond the 3 markets where relationships exist, as mentioned by Management. Since this is relationship based (and not some inherent product/process/brand/knowhow competitive edge) I ceased to be excited and kinda suspect this model and its sustainability.
3). Regulated Markets entry
This was actually the “big” excitement around this stock. Just imagine what it will do when the Injectibles plant (almost fully funded from internal accruals) starts catering to regulated markets!
Statement from Caplin website.“Upon completion of the new plant in mid-2013, Caplin Point will be starting up operations in the fully regulated markets of Europe, USA, Mexico and Brazil”.
Now as we know management has indicated USFDA/MHRA approvals and Regulated Markets entry is atleast 4-5 years away. Which means to me - they can’t do any contract manufacturing for developed markets and even regulated markets like Mexico and Brazil in the next 2-3 years at the least. As we saw/understood, the required infrastructure/people/processes are currently absent and will need to be built grounds-up - so atleast 2-3 years away.
Which means they will manufacture/market for existing unregulated and semi-regulated markets - which is likely to see very little volumes for next 2-3 years.
All my excitement is now gone. The investment by the company of 70 Cr will be a sunk investment for a few forseeable years. I am now worried!
This is again a very big Red Flag for me! What’s going on. Management doesn’t seem to have a firm handle on the business. They do not have the relationships/contracts or the people/processes to come upto speed anytime soon was my conclusion, yet a 70 Cr investment by an annual 100 Cr business size? Counter to common-sense, for me.
Must admit they were putting up what seemed like a modern drugs manufacturing plant to our untrained eyes. There were 2 very competent PHD/post-grad folks who took us around and answered our queries - frankly that 1.5 to 2 hours was the only substance-time for us!
But by this time, I was really curious about where is the substance in this company.
4). What makes this company tick? Why has it succeeded so far?
My attention now turned to establishing 'Substance" in the company.
Since they were already making formulations - there must be good API/complex chemistry skills, peoples and processes built-up over the years, sourcing from China, binding and formulations skills - where are these actually being manufactured? what is manufactured where? Do they manufacture to n+3 stage/ Where do they get the rest done? what kind of people are there? How about extensive market knowledge in the company?
That is the time we started getting stone-walled… with only one answer. “We are like the Wal-Mart of the Pharma world. We are in the business of eliminating middlemen”.No matter how much I tried, whatever way I quizzed, I could not get the Management to elaborate on anything. Not even when I politely but very firmly explained that that is how they have probably got here and was a good thing for sure - the healthy cash flows, the growing advances - but surely this is not taking them too far! again more beating about the bush, if you know what I mean.
This was the biggest red flag for me!
Hope this explains everything. I did not want to put things up in this manner in a public forum - but my hand has been forced - so be it, if it is for the greater good!
One may still not GET IT (read between the lines, that is) and “reply” point by point again to whatever I have put up :-). That doesn’t mean we will like to continue the debate. I have said all that I had to say. I reserve my right to selectively comment or not comment at all!
Anyone can always call me or any of the guys who visited Caplin Point. Choice is yours, discretion is ours!