Natural Capsules - Pharma play with solid fundamentals

Hi all,

looks like a stable company in a space which is evergreen - healthcare. Seems to have low Debt-Equity, good Net Current Assets (almost 40% of market cap), very decent Net Margin %, healthy Dividend Yield >2% and selling at a very low PE, below 5.

Is this stock undervalued by Mr. Market? Request experts to analyse and comment.



I had a look at it earlier but problem with the company is that there is no consistent growth and hence reflected in the valuations for the stock.

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Borrowed analysis from a blog


The strong points of Natural Capsules are:

  1. Excellent growth of topline and bottomline at about 20%.
  2. The PEG ratio of 0.25 shows there is huge room for appreciation.
  3. ROE is consistently going up. It has gone from 15% to 22% in a span of 5 years.
  4. Net profit margin is pretty good at 15% in this industry where making capsules does not offer big entry barriers.
  5. Reserves per share is 33 Rs. It is good when you consider the CMP of 44.50.
  6. The PE ratio of 5 offers large appreciation potential.
  7. The dividend yield comes about 2.5%. Not a great dividend but it shows the companies commitment to shareholders. Moreover the company has steady record of giving dividends.
  8. Inventory has come down reducing the storage and lock-in capital drastically.
  9. Net working capital has come down showing better operating discipline.
  10. Debt is manageable.

Letâs look at some concerns:

  1. The receivables have gone up. Account receivables are now 33% of the revenue. It was 15% of the revenue in 2004.

The company will be under micro cap category since its revenue is very less (=26 crores only). Micro-caps have their own negative points as their prices are prone to manipulations in stock market. The companyâs growth prospect will also depend on how it leverages the arrival of drugs companies in India and abroad. The market is huge for a micro-cap to grow.

I also did cashflow valuation for Natural Capsules and here is the result.

UFCF Calculation (in Crore) Mar â05 Mar â06 Mar â07 Mar â08 Mar â09
Op Profit 3.51 4.59 4.74 5.54 7.43
Tax 1.07 1.18 1.14 1.63 2.19
Depreciation (No need) 0.00 0.00 0.00 0.00 0.00
PBDIT â Tax 2.44 3.41 3.60 3.91 5.24
Change in NWC 0.65 1.48 1.60 0.90
Capex 0.33 2.43 0.41 -0.59
UFCF 2.44 2.43 -0.31 1.9 4.93
Firm Value Calculation UFCF Growth as per data 19.22%
MY UFCF Growth Rate 15.00% MY WACC 20%
MY Term Growth Rate 0.00% Terminal year after 5th
YEAR ==> 0 1 2 3 4 5
YEAR ==> 2009 2010 2011 2012 2013 2014
UFCF ==> 4.93 5.67 6.52 7.50 8.62 9.92
Present Value of FCF 4.93 4.72 4.53 4.34 4.16 3.99
Terminal Value 19.93
Value of the Firm 36.94 Value of the firm (with cash) 37.07
Value of the Equity 30.78
Intrinsic Value 68.34
Margin of Safety 30%
Buy Price 47.84

Few assumptions for the free cashflow valuation calculation:

  1. Even though unlevered free cash flow growth rate is 20%, I took 15% to be conservative.
  2. I used discount rate of 20%
  3. To avoid any calculation and analytical mistake, I assume a 30% margin of safety.
The fair value of Rs. 48 looks reasonable.


Was looking at this company. Maybe seniors (Hitesh/Donald/Ayush/pharma experts) could guide us-

At CMP of 33, its trading at a M-cap of arnd 15 crores.

  1. Stock has an attractive div yield of 4.5%, a consistent dividend payer over last 5-6 years.

  2. Stock trades at P/B of 0.4.

  3. Low D/E ratio.

Although itas a micro-cap, do we get pharma cos at such low valuations today?

On running the screener, we see a more-or-less consistent sales & profit growth along with stable ROEas. (

Although PAT margins have been sluggish in recent past (possibly due to higher RM cost and higher depreciation on account of regular commissioning of machines over past several quarters), they are still maintained at around 10%.

Promoter holding has inched up a bit over last few quarters.

With signs of consolidation evident in the pharma space, can this be a takeover candidate?


  1. Not much information on their website.

  2. Very poor market sentiment for micro-caps, particularly with poor liquidity.

Pls advise.

I have a very small but basic question,

From website I could get that these guys make the outer coating of the capsules. Seems like a nice business at first. But the question is shouldn’t this capsule coat making be a moat-less, highly competitive (and hence not so high margin) business. So what exactly is that which make them tick, and grow (and will make sure that they shall be growing in future). Without knowing it I don’t think it will be prudent to invest in it.

@Atul: I had bot into this stock few years back and exited then after looking at the volume data - i.e… the no of capsules they produce to get this turnover. AS the turnover was really huge in no of capsules, i just thought that it would be quite difficult for them to scale up meaningfully and hence exited. Even today, the price is lower than that.

So though these cos have value but we need growth in such micro-caps to really unlock the value.



I think we can instead look at medi-caps, kind of cash bargain, they have a big portfolio of liquid investments and whatever other assets they have on their balance sheet, they seem to be generating decent ROA on them.

I was trying to read and research more on this company but could not get access to annual reports. Can someone tell me how I can access annual reports? Meanwhile I’ve also asked the company and still waiting for their response.

Some announcements:

*** 22- Sep- 15 ****
Natural Capsules Ltd has informed BSE that the Company has completed the various documentation (Share purchase agreement, Share Subscription agreement and shareholders agreement) pertaining to the investment of acquiring 40% of equity shares from M/S. Supreem Pharmaceuticals Mysore Pvt. Ltd. The Company is in the process of investing the first tranche of investment Rs. 5,00,00,000/- (Five crores) and the balance installment investment of Rs. 6,50,00,000/- (Six Crores and Fifty lakhs) will be invested on or before March 31, 2016.

**** 26 - Oct - 15 ******

Natural Capsules Ltd has informed BSE that the Company has added one dedicated line to manufacture of 360 million HPMC (Hydroxy Propyl methyl cellulose) vegetarian capsules. This is expected to approximately 15% to the company top line with a much higher operating margin. The line was designed and engineered by in house engineers at a cost of 300 (Three hundred) lakhs funded out of internal accruals.

Members tracking please share your views.


Well, There is something interesting happening in this company finally. Their 100% owned subsidiary was selected under PLI scheme to manufacture three Key APIs, which are currently imported. The capex is well on track and project expected to be commissioned in Q1 FY’23.

From some preliminary research, the price range of 3 APIs which the company will manufacture is in the tune of 30k-50k per kg. The planned capacity is 37MT at an outlay of 96 cr. The API business alone will contribute 150-200 cr with decent margins since these are niche APIs (betamethasone, dexamethasone, prednisolone) and are currently imported.

Under the PLI scheme, they are expected to receive 65 cr over a period of 6 years starting FY’23.

Besides, the core biz of capsules has been ramped up recently and expected to report higher numbers this fiscal.

On 250 cr revenue (conservative estimate) even if they do net profit of 25 cr, at PE of 20 mcap should be 500. This is my reasonable estimate without considering 11cr p.a expected from PLI.

Disc: Invested and may be biased, Not a registered advisor.
I am just trying to do my bit for a community which I have gained a lot from.


What are the other manufacturer who works in same APIs?

Company declared Sept results. Good growth YoY, anybody still tracking this company?

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DEXAMETHASONE - NCL will be the only manufacturer this product in India. Planned capacity is 10MT , Imports to India FY21 is 19MT

BETAMETHASONE - NCL will be the only manufacturer this product in India. Planned capacity is 12MT , Imports to India FY21 is 25MT

PREDNISOLONE - NCL will be one of the two manufacturer this product in India. Planned capacity is 15MT , Imports to India FY21 is 30MT


The company came up with a Investor Presentation (IP). I guess it’s their first one. I have a theory that when some company comes up with it’s first ever IP or concall, OR it does a call/IP after a considerable time gap, investors should take notice. When things are going good for us , most of us like to share the news with others. It could be same with companies ? Putting a gist of the info provided in IP.

  1. Their core business of capsules went through a period of pain during 2015-18 due to lack of demand in the export market & pricing challenges in domestic market. Exports which used to be ~20% of revenue reduced to just about 10% during this phase. Capsules mfg. seems like a bulk business where it’s important to be the cost leader .

  2. Things started looking up since since 2019. They now see a increase in demand from both domestic & export markets. Exports have more than double in FY21 vs FY20. Meanwhile company has invested in R&D and claims to have come up with new generation machine which are fastest machines to manufacture capsules globally. That’s a very tall claim !! They claim the new machines can manufacture ~5 MCPD (Million Capsules per day) compared to earlier machines which manufactured about 1MCPD. These machines were developed in technical collaboration with DBDS Robotics Pvt Ltd. So the claim is, these new machines will lead to operational efficiencies and make them a cost leader again ?

  3. They have been on a spree to replace old machines with these new generation machines. As of Q2’22 they claim to have installed 4 new generation machines and capacity stands at 13.3 BCPA It was 7.8 BCPA in FY20, 10.8 at end of FY21. They plan to expand capacity to 24.1 BCPA by end of Q2’23. That’s close to 2.2x capacity growth on FY21 basis by mid of next FY. Around 38 cr. capex planned, with 20 cr from internal accruals and 18 cr from bank at 6.4% interest. Expectation is for 3x asset turns.

  4. So am assuming they can reach about 200 cr. of annual revenue rate after the Q2’23 capex is done. FY21 revenue was 80 cr. Both revenue and margins have been on an upward trend since 5 quarters. So don’t know what’s a stable margin rate for this business given the operating efficiencies they are talking about. But if we take the last Q’s PAT margins of 8.7% to be sustainable in long run, then at 200 cr. revenue runrate from core business, a 17-20 cr. annual PAT generation is a possibility from FY24 onwards

  5. Now coming to their breakthrough in API manufacturing, as detailed in above posts, they have got PLI approval for manufacturing of 3 API’s which predominantly imported into India. They claim that, commercial production for these APi’s will begin from Q2’23. Total capex outlay is 96 cr. 48 cr from loan at 6.4% , 20 cr internal accruals, 28 cr from right’s issue. PLI will reimburse them 67 cr in 6 years. The payout under PLI is 20% each of first 3 years, 15% for next 2 , 5% for next 2 years. So overall, i think they will be in a position to close the bank loan from PLI proceeds in just ~3 years.

  6. They expect 3x asset turns from this capex, so that puts the annual revenue potential at close to 290 cr!! No idea on the margins this business can generate. But the API seems niche as the PLI approval has come under 2nd category of Fermentation based niche KSMs/ Drug Intermedia/t APIs

  7. I am pleased to see that such a small company has been spending close to 3% of revenue in R&D for last 3 years. Has 1 patent granted, 1 under approval, 2 under filing. The key areas of research seems to be steroidal and hormonal range of API’s.

  8. EV is at 134+20 = 154 cr. and a right’s issue is coming up at 100 in 1:2 entitlement ratio, which should further reduce the acquisition cost. Record date for right’s issue issue is 12th Nov. At current price, and full right’s allocation, cost of shares will come down to 176.

Disc : Invested in this week.


As per Page 13 of the Investor presentation, the company was operating at 107.56% capacity utilization of the 10.8 BCPA capacity in FY 21. Now, the capacity has increased to 13.30 BCPA from Dec 2020 and sales have increased close to 40% since then. Now, I would presume that they are again at full utilization of the capacity installed and the new capacity increase to 24.1 BCPA will come online only in Q2 FY 23 i.e. one year from now. Till then, the interest & depreciation expense will probably increase (if they do not capitalize the interest cost). Also, the API production will also begin only in Q2 FY 23. Therefore, we are in for one full year of stagnant performance as per the available information. Or am I missing something here?


So for next 2 Qtrs, lets say, they look set to give atleast 30 cr revenue rate , assuming demand & capacity is not a problem. Thats yearly growth of 40% in topline in FY22. Bottom line will be better.

Q1’23 if they maintain 30 cr rate, then its still 20% growth YOY basis. So Q2’23 is the only flat growth quarter possible if all our assumptions are correct.

Aren’t we missing the larger picture worrying about a quarter of possible flat topline performance ? :wink:


Agreed on the above. Let’s see if the stock consolidates or the market gives a correction to add.

Moneycontrol making it big episode from 2015, lists ACG as world’s second largest manufacturer and India’s largest manufacturer of hard gelatin capsules.

Their site lists their capacity at 120B capsules per annum. About - ACG
So comparatively, Natural Capsules capacity at 13.3 Billion looks miniscule.

May 2020 article lists unavailability of raw material, gelatin, as a crucial headwind the industry faced. However, not sure what happened about it’s availability and rates, Natural Capsules seems to have done well ever since this article appeared… it’s been doing well both in terms of revenue growth and margins since last 5 quarters.


Any scutlebut on the management quality/corp gov by anyone?

hi pl read this

a very good good work by this person connected the dots beautifully. If still somebody wants to invest, it is his call