Any idea on why we had a lower circuit today?
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Cupid Limited Q4 FY-22 Earnings Conference Call
Highlights from concall (transcript here)
Impact this quarter:
- The sale of female condom was less due to delayed arrival of lab results and also due to the non-availability of containers during the quarter.
- Also, we had some external challenges as well, including the supply line issues as well as the depreciating South African Rand, which impacted their frequency of orders.
Positives
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Strong order book of 187 crores (against TTM annual revenue of 137Cr)
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84 Cr cash out of market cap of 300Cr
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Revenue through female condomn sale is increasing
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Repeat orders from UNFPA and other private customers.
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There might be additional revenue (around 2-3 mil) in 2024 if USFDA approval comes for female condomns
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Obtained six manufacturing licenses for our In Vitro Diagnostics kits from the Drug Controller of India for both domestic and export markets
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Very good traction on initial marketing efforts for IVD. More scope for expanding topline.
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Expecting turnover of about 145 Cr and a PAT of 20-25 Cr. Considering the mgmt is usually conservative, there is a good chance they will beat these estimates.
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Potential acquisition by large companies. They are in talks with one of potential buyers.
Overall
- Quite stable orderbook assures capital preservation and controlled risk to invested capital
- Mgmt is usually conservative. But this also results on the topline being a bit stangnant at times.
- There were concerns on succession planning. Not sure if this has been addressed.
I believe that there is a good potential for the value to be unlocked over next few years if they are acquired by a branded player or establish in key markets (US). Very limited downside for now, but do not expect significant growth either in next 3 qtrs.
Discl: Invested
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Could you please explain process for USFDA qualification? Or share some reading references ?
These are general rules for USFDA approval process. Mostly this relates to drugs and medicine. So I’m not so sure if it applies here.
From what I’ve heard in Concalls, it gets easier if it’s already UN-approved. Then it also needs a long period of testing and the results submitted to USFDA (Which Cupid did in Africa).
UNFPA pre-qualification process: Prequalification Programme for Female Condoms
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Cupid bags new order worth 8.19Cr.
Disc: Invested
Started following Cupid recently-
From the conncall it seems apparent that Cupid could be acquired and discussions ongoing- why would Cupid entertain such a move given their strong positioning and potential for growth…fail to understand the logic - kindly appreciate views on this aspect.Thanks
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They have been looking for the next CEO for a so long time. Still they couldn’t find a replacement for the current CEO. This might be one of the reason.
Execution wise the current promoter and CEO has done a good Job.
Disc: Not Invested Currently
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Cupid Ltd. Q3FY23 earnings call highlights.
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Main reasons for healthy performance in Q3FY23 are:
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96% sales in exports, where we have advantage of Government of India export incentives as well as we have the benefit of depreciating rupee against the US dollar when we submit our invoices to the customer.
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Steady and declining input costs during the quarter.
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We had more sales of high-margin item, which is female condoms as compared to the quarter before.
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Our projections for the fourth quarter is for improving the top line at 20% and the bottom line by 20% also using the third quarter as a base. So we expect a minimum of INR 10 crores profit in the fourth quarter.
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Cupid has applied for a WHO and CE mark for our IVD products during the quarter.
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Cupid started an employee share plan ESOP for 27 employees. Cupid has done this ESOP plan for the first time in its 25-year history. we have offered this option to 27 employees at a price of INR 140 per share. And it’s a one-year lock-in period and could be cashed out in the next two years or a total of three years.
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Order book is robust at INR 171 crores as of January 1, ‘23. 60% of the orders are for male condoms, 31% orders are for female condoms and the balance 9% is for lubricants.
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We are expecting some big tenders coming out later in the year for male condoms from South Africa from Tanzania and from India. Also, in March or April, we are expecting a tender from Brazil for female condoms. And also, the South African requirements for the second year of the three-year contract is expected to be out in the first week of February.
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IVD update
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For the Indian market, we are eligible, and we have started to do the commercial operations to the various state governments through their tenders and also sales to the private sector. However, for the central government tenders, we need a three-year manufacturing experience to qualify for the participation.
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Now in terms of the export orders, we need WHO and CE mark to be able to export the goods. This is the requirement of most of the countries and in some countries, there is a requirement for ISO 13485 Certification, which Cupid has already obtained.
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The margins are quite a bit better in the export sales, 35% to 45% as compared to about 20% in the domestic sales. And the five countries we have identified, with the most potential are South Africa, Kenya, Tanzania Nigeria and Zimbabwe.
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In terms of the products, the most in demand are HIV, Malaria, syphilis and hepatitis.
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So although we have been slow in starting the commercial operation, we expect a good business in the second year and certainly, starting from the third year.
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In the year '25, we expect INR 50 crores to INR 100 crores turnover in FY '25 from IVD.
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The FY '23, the IVD sales would be minimal. We are pegging it at a maximum of INR 1 crore. And in FY '24, our target is INR 5 crores to INR 10 crores only because of the limitations I mentioned i.e. lack of the WHO prequalification and the CE mark. However, in the next year, financial year '25, we should be able to participate in the export orders for IVD.
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Breakeven will be at about INR 5 crores sales.
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we have over INR 100 crores available with Cupid. we have the dividends is one outlet for the funds. And number two, if we look at any further expansion or adding for an another vertical like feminine health and wellness program, that could also require some funding and third and most important, we are also considering buying back of Cupid shares.
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in terms of the stable and declining input prices, we have in general, 7% to 8% decline in terms of the foil purchases and in terms of the packing material. And in case of silicone oil, it’s upward of 20% decline in the price, during the quarter. The only exception is a 5% to 7% increase in the price of latex, during the quarter as compared to the previous nine months. So we are expecting the stable or downward trends to continue, and that should directly impact on the profitability of Cupid business.
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The most important is the latex. And I mentioned then this in the past quarter, there was a slight increase and beyond the rainy season in Kerala, starting from May, we expect the downward trend to resume in terms of latex prices. The second most important component is the silicone oil, which was getting imported from China. And suddenly, because of the economic slowdown there, the prices crashed. And actually, in the last quarter, we had a decline of as much as 27% in the silicone oil prices**. China opening up won’t affect negatively to input prices to us as we have done the procurement for the next six months until June**.
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FY25: IVD alone, it would be INR 50 crores to INR 100 crores and from the condom business, we could expect easily INR 180 crores plus.
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FY '24 projection, it’s about, I would say, a minimum of 10% improvement in the top line and at least a 20% improvement in the net profit after tax as compared to the FY '23. So we are looking at a very healthy performance even during FY '24.
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The reason we are expanding our business verticals is because there is a limitation in terms of how much we can do the expansion in the condom business. And number one, the space we are located in, is completely occupied. We have to buy new land or move the factory to completely a new location and with all the infrastructure there. We have to look at a consistently high demand from the world market. If we build the new facilities and there are no orders, so we would not like to be in that situation.
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the discussions with the Singapore party are going on, and we are looking at the agreement whereby Cupid would do the manufacturing on their patented products. It’s going slower than we thought, but it is very much in the process. Further last month, we also received another request from a company in the United States, who would like Cupid to manufacture their products in India for them. So they have visited the factory, and we have initiated the discussions with them as well. Both these possibilities are going a bit slower than what we thought, but they provide a good indication of the market demands for manufacturing going forward. Singapore party are looking to manufacture their two patented products related to the detection of diabetes.
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For the female condom, the US FDA is reviewing our application for approval of the female condom. So the feedback from US FDA is that they would like Cupid to do a clinical study in US using US participants as compared to the earlier study, which we did in South Africa. in terms of male condom penetration, there was a question of product liability issue under discussion.
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if we work at full capacity, we can easily have at 480 million male condoms at INR 2.5 per piece. So it would be about INR 120 crores -or-so from male condom. And for female condom, we can produce 25 million pieces if we – have the orders and which is at a minimum of INR 20 per piece. So that is again over INR 100 crores revenue from female condoms.
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Dec 19, Dec 20 and now Dec 22 has same quarterly PAT of 10 Cr as per screener. Not sure when this company is going to realize its potential…
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Below are my views, which could be wrong and speculative in nature.
This company is quite conservative and is struggling to break away from the manufacturing mindset to consumer product mindset. They are still dependent on B2G contracts for which the growth rate will not be that big.
It seems that their strategy is to keep the company going at current pace without taking big risks until they find a suitable buyer to buy them out. Few things that support this argument:
- They are not enthusiastic in bringing a fresh group of folks in top management or at least have a plan towards it. Been looking for 3 years and in last 1 year they stopped looking
- Their capacity utilization is always at 95% or higher for last 2 years. Expansion is not much in the play.
- Revenue growth is in order of 10-15% CAGR, which is too low for an early stage company. No serious initiatives to unlock the potential.
- Significant cash reserves that remain undeployed for long
- Been talking to “few people” about acquisition of Cupid for last few quarters. Given that mgmt was conservative, I would expect them to close the deal if there is fair value. But, since they didn’t close any deal for so long, it appears that investors are not valuing the potential that much.
I have been following this company for 2 years and I should say that my patience has finally run out. It is increasingly appearing that this is a value trap compared to other opportunities available in the market.
Overall, Cupid seems to be a startup which is moving like a very large corporate.
Note: There is no serious red flag in the company and there is very low risk of capital loss. The mgmt is shareholder friendly and I trust their integrity. But, just that I am doubtful on their capability to unlock value, compared to other opportunities in the market.
Disc: Invested. Might exit soon.
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I had participated in last two concall.
1.Yes, they may sell if suitable buyer approached 2. Condom manufacture have reached almost its highest level. No capex for incremenral production .
But mgmt is serious about its business. 3rd vertical of medical devices manufacturing is added and possibility of scalling up another 200cr in the medium term. Mgnt approaching new clients and serious in getting certificates…
Disc. : Invested
Notes from Q4 FY23 concall (E&OE):
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US FDA
We are gearing up for the new study based on their suggestions. Study will take 9 months from now, and then 3 to 6 months for their approval. Hoping that by this time next year we will have US FDA permission. Expecting sales of USD 1 m. with 50 % net margin (after all the marketing expenses) in the first year. -
Africa / LATAM
Expecting more tender orders from Brazil and Tanzania. One Brazil tender to open in later part of June next month. South Africa tender will be in 1st week of June. -
Export
Export performance includes govt incentives. -
Guidance
Expecting 10 % growth in revenues and profit both in FY24 i.e. minimum Rs.175 crore of which 75 % will be MC and 23 % will be FC and 2 % Others. Thinking about business expansion. Could add MC & FC capacity but not yet decided. -
Cash utilization
Capex required for expansion and W/C requirements for IVD operations, so no buyback right now. Will take a final call in the next few months. -
IVD project
Expecting revenues of Rs.2.5 crores for FY24 and Rs.5 crore for FY25. WHO approval will take 12 to 15 months, after that big opportunity will open. Large Govt tenders require minimum 3 years’ experience which we do not have currently so we cannot participate. We will complete 3 years in Nov 2024. Breakeven for the project will be after sales over Rs.5 crore. We are convinced this is a good business to be in. Rs.100 crore business can be achieved after FY25. -
Sale of business
Negotiations are going on, expect it to be finalized in the next 6 months. Right now, ball is in the investor’s court, we have provided all the information they wanted. They are independent financial investors, not pharma companies. They are interested in buying our entire 45 % stake, I may continue in an advisory capacity for a couple of years. We are expecting Rs.300 per share. -
Order book
Current order book Rs.177 crore. Today’s Order cancellation - it was about Lubricant Jelly. There was some deterioration in product quality during transit. -
RM Prices
Our main RM is natural rubber latex. All input cost prices are stable or down 5 to 7 %, only rubber is 6 % up from Q1 of last year, it will come down after rains start in Kerala in June. We hold only 2 weeks latex inventory. -
Market opportunity
Indian market for MC is large but has only 5 to 7 % margin as it is very competitive. So manufacturers are not making much money. Export market has 20 % margin. -
Succession planning
Potential investors will have their own plan and will come with their own management team. We were not able to find a CEO, rest of the internal team like COO etc. is there. Company does not have any other plan, there is no successor from within the promoter family.
(Disc.: Holding)
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I had invested in Cupid 3 years back as valuations were dirt cheap and all the ratios like ROCE, ROE, debt, cashflow everything seemed great at that time. I gave up after staying invested for 2 years. Here are few of the reasons for the exit:
- There is no succession planning. Mr Om Prakash Garg has been saying that they are looking for candidates for CEO position since i don’t know how many years but couldn’t find anyone. Seriously? he couldn’t find a CEO? Every call, he said same thing from past 4-5 years.
- They don’t have anyone else in the board who can attend the earnings call. Investors have been requesting to bring someone else along with him.
- They have been trying to get USFDA approval since long time, application itself took so much time.
- in Q3 FY21 concall, he mentioned that medical device business will have sales of around 50Cr from FY22 and that division didn’t pickup at all.
- in same call he said revenues will be around 200Cr from FY22 onwards. it is still around FY20 numbers. Here is his statement from the call: “Starting the first quarter of FY 2022, we are projecting an increase in revenue from say about Rs. 150 crores to a total of about Rs. 200 crores. And the margins would improve accordingly as well. If we take a 20% net profit, then you are looking at about Rs. 40 crores for the next financial year”
- There were plans to increase marketing spends and partnering with some firm to increase D2C reach, nothing happened in that area.
- They were in talks with Veru for the acquisition but couldn’t close that deal.
- They are sitting on good amount of cash and in the past mentioned about the buybacks but it didn’t happen.
- They are totally reliable on tenders from governments and non-profits, which depends on economic conditions and many more things. I don’t think we can have structural growth by participating in these kinds of tenders.
In conclusion, Management is not fraud or anything but doesn’t have motivation to grow. Investors can make money only if someone buys it out. Porinju Veliyath sir also bought stake in this company after the bumper growth till FY20 but then lost patience and exited.
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Was it porinju or basanth maheswari?
I am not sure about Basant Maheshwari but Porinju sir invested through his firm Equity Intelligence India Private Limited.
But now that they are looking to sell their stake, most of these things like succession plan etc doesnt matter right?
Yes, change of management can be good. But how long it will take to materialise, that we don’t know. And the current management doesn’t have good track records in closing the deals.
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Management is guiding sale will be finalised in 6 months
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Very succinctly put.
Most of the growth drivers are down the line12 - 18 months. That is if technically everything is fine.
Discl :Invested small position.