Hitesh bhai,
There are many participants in your thread in passive mode. I have been one of them for last 8-9 years. After going through your last 6-8 week discussions, I was going through concalls of Alembic, Aarti Drugs, Laurus in that sequence. However when I finished going through Annual reports, discussions, concalls, etc. priority was in opposite order. After 21% on Thursday, I took allocation to 30% on Friday morning considering it a High Undervaluation, reasonably high conviction bet, as discussed by Donald and yourself in Capital Allocation Framework Thread. Ben Graham also had a 20% limit, but hard limit was 40% (used for Geico). I decided against 40% since there were more opportunities in same sector - API as you discussed. Was thinking of adding another 5% allocation after management indicated that Q1 results could become baseline going forward, when above mentioned HNIs and fund guys namely from office of RaRe enterprises and Madhu asked questions, and immediately upped allocation to 35% (on cost basis) realising that there’s no point trying to time the remaining 5%. You guys have really provided us a lot of learning and support in understanding stock selection and portfolio allocation over the years. Hope I am able to do justice to the learnings.
My thesis is:
Sectoral Tailwinds:
- Chinese bulk drugs/ API manufacturers had 3 advantages: externalizing cost of pollution control to environment, low cost financing, operating leverage due to huge size on account of previous points. Now, since 3 years Chinese govt. started becoming strict on pollution treatment, hence some plants were relocated, effluent treatment charges - costs incurred. Operating Leverage is working for some of the Indian manufacturers who weathered the 2016-20 period. So all 3 factors are nullified to some extent.
- Formulations manufacturers worldwide seem to be looking for a robust supply chain and hence diversifying out of Chinese suppliers (may be only for a small fraction of inputs by now!!) and looking at Indian suppliers. To a lesser extent during above mentioned relocations and definitely after Jan, Feb this year.
- General apathy towards Chinese suppliers by some major markets. This seems more of a geo-political construct then a business construct, but could play at the back of minds of lot of people, including investors. At the same time, goodwill for Indian pharma.
- Generally the pharma cycle seems to be turning and many of the APIs are supplied by Chinese suppliers at 10-20% higher rater during last 6-8 months. So this does not seem to be a temporary covid phenomenon either.
Laurus:
- Huge quantities in ARV - low cost production.
- Dynamic management - ability to change product mix for higher gross margins reflects that. Also foray in CDMO reflects that.
- Global market - Entering into long term JVs for CRAMS, marketing of FDF through partner, participating in tenders ala SA for ARV, global launches
- Vertical Integration - Increasing FDF revenue as % of total sales.
- Negligible US exposure - a) Less regulatory risks b) Have USFDA approvals, so huge market.
- Growth minded management - could become a negative soon if overdone - need to keep a tab.
Actually the above are all attempts at rationalization, but the only rational thing is Earnings growth.
Seems like a 2-4 year bet for now. But need to keep looking at earnings. If Earnings growth is less than half (or even two-thirds) of PE, I might want to remember how Chandrakant Sampat sold 10% every Wednesday at 12 noon till down to sound sleeping level.
@hitesh2710 What do you think are major risks to this story? May be it’s too premature to ask, but - What would you be looking out for to take any calls along that direction? (You did already mention capex)