very good pot by our own Dinesh Sairam
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Also the existing internal auditor resigned and new auditor came in as of aug 25.
Those are at least Hygiene products. They’ve expressed interest to get into Female Hygiene industry several times in the past. So, I wouldn’t say it’s too far off.
But let’s not be too quick to judge. Maybe they have an action plan in place or maybe they are confident they can build a team that can handle manufacturing Medical Devices.
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Conference Call Just ended. I captured what I could for all of us:
Borrowing : Temporary WC of Rs. 31 Cr. Down to 17 cr. The finance cost that we see is the interest paid during the quarter. The borrowings is planned to be zero by this FY end
Sales: 150 Cr. Orders will be delivered during FY 21 will be implemented (60% male and 40% female)
USA sales: Sale of Female Condoms will begin in FY 22 after FDA approval. It has a huge profitability. 2 Distribution channels being looked into. There (is only one registered FDA). Registered users as well as prescription-based channel. Someone will head this business based out of USA.
International lawyer: Fulfilling SEBI woman director requirement. But Ms. Nalini’s expertise will be useful in all export business.
On real Estate Investment of previous years: Didn’t reply immediately on real estate investments on real estate. Asked for an email.
Medical Devices: Company has decided to go ahead with Medical devices for COVID and other diseases. Company plans to set up manufacturing facility within the factory premises. Production in late November this year. These are Rapid Test kits for virus, detailed analysis of test as well as for devices for treatments. There is a big demand in South Africa and Brazil. Govt of India, Brazil and South Africa could be the first customers. Revenue of 20 Cr to 30 Cr. Is expected by March FY21. Budget for this will be 12 Cr, that will be from internal accruals. Devices has better opportunity with limited players in India. Many devices are currently imported from China. Many devices would be introduced gradually. Machinery will require only 3-4 cr. The margins could be around 20% to 30%. Company will not venture into pharma products like Hand Sanitizers etc.
What happens to medical devices Investment post COVID? Company does not see a slowdown in near future of 5 to 7 years. The devises will also be used for HIV, Malaria, Dengue and other infectious diseases. We will come up with new products for these investments. Expecting tenders from governments across the world.
Dividend: May look at increasing dividend amount in future up from 25%.
Female condoms sales in India: No awareness in India hence no demand. Currently selling via on-line through Amazon and some distributors in major cities. Company waiting for demand to pick up.
New CEO/Succession plan: Some duties of Garg will be moved to Mr. Suresh Chand Garg. Still looking for a new CEO.
New Investments for new orders: Will not invest in new machinery till we see strong order for at least 2 years. For smaller amount excess orders, we will outsource.
Resignation of Auditors: They were overloaded in work and mutually agreed to part
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Thanks for the detailed summary. One thing which I found incremental was apart from the 117cr order book mentioned in the press release, there’s another 6cr order post June. As well, Brazil order for female condoms worth 45cr is not included in this (will be received in September). So overall, the order book looks robust (at least for FY21).
One thing which I found extremely intriguing was the consistent real estate write-offs. Is anyone else aware of such happenings? While I have found Mr. Garg very capable and honest, is this a potential red flag for the management’s integrity?
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I think these were 2012 to 2017. Nothing after that. I think he mentioned the total was 150 Cr. expectation.
I think it was quite a productive call. he dropped a huge surprise on the medical devices half way through the call. i think Cupid is in good shape with medical devices and USA FC entry as growth drivers.Brazil order of 45c was a dampener (compared to 120cr before) and no order from SA was also a downside but that comes with the risks of running a tender business. Overall despite the nature of the business being lumpy Garg has managed to scale the business with decent profitability and ROE.
there was one caller who continued to probe on some investments to the tune of 47 lakhs made between 2011 and 2014 into some real estate companies which were subsequently written off insinuating something fishy. Although they seemed like valid qns the tone was a bit unpleasant. Cupid has been a good dividend paying company and the transparency with qtrly calls directly with the CEO is unmatched. Considering the quantum of the investments 0.5cr I found the detailed probing quite unwarranted.
He certainly doesn’t need to come on a call every qtr and spend 90 -120 mins answering questions from minority shareholders. So we should appreciate this.
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Thank you for the detailed post, Sunil. That answers my questions.
The Real Estate write offs are, without a doubt, a red flag. But these were very small amounts (At least compared to the Profitability of the company as on date). Like @eng10947 said, Cupid has been very Shareholder friendly in other regards, it makes sense to ignore this small mishap. We should keep an eye on future activities similar to this, of course.
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Great concall… business looks to quite healthy. The devices business could generate 25 cr revenue with 25% margin(in 1 qtr)… with only 10 cr capex, is great capital allocation… if we get similar revenue on a yearly basis it could be a big growth driver… its certainly worth a bet as it’s high roce and very little capital being deployed… even if revenues dip after a few years, return on capital will be fine.
The tenders are yet to come in September… so hope to grow the order book further… big SA tender and small UNFPA tenders will be coming up in this qtr.
Overall quite satisfying to see how mr garg is venturing into new opportunities as most ppl seemed to be concerned about his hunger for expansion… The 45 lakh write off is something I’m least concerned about and I too thought it could have been put up with a little more regard for the man.
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Not really sure I got the SA tender piece. Did he say there will be a FC tender from SA this year? Any idea on size?
In my view Mr Garg is quite a shrewd businessman so I wouldn’t think he would venture into new areas unless there is a decent profit to be made.
Addition to your notes,
In Raw material Prices, Mr. Garg said that their raw material Latex Rubber prices decreased from Rs 114 per Kg to Rs 107 Per Kg so we may see improvement in margins in upcoming quarters.
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In the concall, did the management mention anything on the topline and bottomline for the coming quarters and whether the runrate of Q3 and Q4 of fy20 can be maintained?
Very interesting Con Call and the venture into medical devices seems interesting. Was there any indication regarding bottom line impact of the same? I believe he said 20CR top line but I wonder what the profitability of the same is.
Regarding the real estate write offs it does strike a concern especially in a small cap company like Cupid, however the caller also questioned Mr.Garg’s salary which he then clarified has remain unchanged for a number of years so maybe we should take the accusations with a pinch of salt?
Top line for next few qtrs should be around 40 cr… as far as medical devices business goes it should have 20%+ margins… the topline guidance does not account for any income from medical devices… if they do get any sort of revenue in this fy… they should easily do better than 160 cr… even in a covid impact year
I am very interested in investing in Cupid but just had a few questions and this seems the best place to ask them
- At what point does the market ever re rate lumpy business models? For eg If Cupid hits an average of PAT 250+ crores over 5 years in the form of 40 cr, 60, 30, 70, 50 cr instead of the general 20 percent growth per year in a linear manner 40, 48, 60, 66… can a company be considered to have secular growth for the future? and what PE can one expect if so? Or will every bad quarter cause panic and good quarter cause euphoria? Are there examples of lumpy businesses trading at high valuations?
- Considering the high cash, good dividend payout and low free float (just over 1 crore) is it not still a good investment at this current price over 5 years since out of the 150 to 200 crore profit around 50 rs would be given to share holders via dividends which is a pretty good safety net to prevent it falling too low from this level. Or am I wrong in assuming that? Would have preferred buying it lower but the current drop seems like a good time to start buying
I’ve never really looked at pure tender driven businesses under 1000 Cr Mcap before so I’m having a tough time trying to build conviction and it’s a strange feeling since I love the management and business in general. I want to be prepared so I can stomach the huge rise and falls ahead especially at almost no margin of safety right now. Apologies for the post. Please delete if inappropriate
Edit: Thanks for the replies. Decided to wait for an unfair price ie around 160 or under to buy now considering the succession issues and since it’s not covid safe based on management guidance for this year and due to dependance on government tenders in developing countries who may shift their priorities for a bit. Will buy at an unfairly low price now or wait for a while until the CEO issues resolve, US entry begins and tenders to come back to normal in which case i wouldn’t mind buying at a higher price based on all that clarity since margin of safety and fair value is relative based on the situation…cheers.
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I think the company is getting low valuations not because of lumpy business but it is more to do with entry barriers. The market size is not very big and if few more people enter the fray then not only it will split the revenue but also impact fat margins they enjoy. There are very good condom manufacturers in retail trade. What stops them from competing in this tender business?
Tender business which is b2b kind of business is more like client concentration. That is always a risk of sales moving quickly to others.
Only attractive thing is growth and valuations. Growth is unpredictable here.
You can allocate here but it cannot be 10% allocation in larger portfolios.
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I have been tracking cupid for a while. Here are some of my concerns regarding the economics of it and consumer behaviour. The contraceptive market at end of the day is a consumer facing market. The products have a peculiar consumer behaviour characteristics. The customers buying it usually have 2 avenues. Online and the local pharmacy. The local pharmacy(at least 2-3 kms away) is more convenient in terms of availability and timing rather than online options. Customers who are shy or embarrassed to buy from a local store might go for bulk orders from an online retailer to hoard their stock while still in delimma of gharwale asking -“Kya Mangaya”. Since majority of people face an embarrassment while buying and wouldn’t look for a bargain the pricing power might be strong with this one. Now here are my concerns and questions:
1 - Even though cupid has started selling condoms on selling the products on online avenues, how focused are they really on increasing focus on this kind of retailing over the order based delivery? What percentage of their revenues is generated via these avenues? Might give an insight on customer recall over a 5 year period. I don’t think it is a game as much of branding as it is of a strong presence in market. Rather this game can be rigged in a local market. A brand can always ask its distributors to put in their product first than any other for a marginal commission. The continuation of which might give a free branding advantage.
2 - Is order based delivery a great way to move around the aforementioned consumer behaviour to aim for simplicity and consistency over other brands? And how many customers who place these orders have been their repeat customers over the years? What business growth have they enjoyed from these repeat customers if any?
3 - Is their distribution network cheap and strong enough to get their products into those shady looking chemist shops where all the buying is done?
4 - If they are focused on all these things why are they shifting focus on medical devices manufacturing?
5 - Are all the above factors responsible for them to make a decision to keep the contraceptive business as a cash cow operation to develop a more consistent earning power business?
Insights, thoughts, criticisms?
Cupid is not in the business of retail condoms… its completely focused on high margin/high cashflow business… the retail condom market doesn’t make roce high enough… so cupid is absolutely right in not chasing that arket just to have sales and brand visibility.
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Cupid seems to have had a phenomenal run last couple of years fwhen sales almost doubled from 85 Cr to 161 Cr and it has held up in the Corona pandemic times. Key will be to understand why the sales increased and if it is sustainable.
Sales CAGR is >20%, RoCE has been 20% plus for the last 6 years. The RoCE is mostly driven by the high Net Profit Margin %. Company has generated FCF in every year, is debt-free. Earnings yield is more than 8%
There seems to have something big turnaround since 2015 and something magical since 2019. Prior to 2015, the company had almost no profits (or profit margin), the 10 year CFO is just 51% of Profits, meaning something happened to that money. Receivables days are very high at 90+ days
While the company looks good for investment, I would like to go through the annual reports (or hear from others here), as to if the sales growth of 2019 is sustainable and what fundamentally changed in 2014 and 2019
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You have solved your own predicament quite well.
The numbers alone make no sense, even if they’re fantastic (Such as the case with Cupid). You have to have the context of the business and put the numbers and business together like puzzle pieces.
I suggest you start with this thread itself and then move on to Annual Reports and Concall Transcripts for better understanding.
All the very best.
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