Natural Capsules - Pharma play with solid fundamentals

That’s exactly what I made of it as well. If the HPMC capsules don’t take the margin back to 19-20 then probably it will hover around the mentioned range till API gets approved for the regulatory markets which may seem some time away. Ofcourse any favourable price movements of the API products under consideration can affect the overall margins positively. Just my humble understanding.

Disclosure: Invested

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Natural Capsules making 5.5 crs of investment to get 10.66 MW of renewable energy… After raw material, power is the second biggest cost for them… In last 4 years, they have already reduced power cost as % of sales from 15% to 8%… even in the subsidiary where power will be one of the main raw material due to the manufacturing process that they will follow, It would be interesting to see how this cost will behave over next 2-3 years…

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Investment announcement by the company:

M/S SOMERSET INDUS HEALTHCARE FUND II and M/S SOMERSET INDUS HEALTHCARE INDIA FUND have invested 2nd tranche, Rs. 25 Crore in M/S Natural Biogenex Private Limited, at a pre money valuation of Rs. 250 crores.

Looks like the 2nd “need based” investment was indeed executed.

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Stock hit upper circuit today. Do you guys think it is because of the new acquisition?
Disc- Invested

The timing of the move does make it look like it was a “news” driven move.
But the strength of the upmove remains to be seen, as there’s no “new” news.

This is just the 2nd tranche of the announcement months ago, and at the same valuation. So does the market know something we don’t, or is this just a big day after a “big news” dropped, moving after months on consolidation. Will definitely need to see the price-action in the coming days/weeks.

Disc. - Invested

Any updates on the PCB approval that was pending as the regime changed. I had mailed them but they are a bit busy to respond to that. The last update on Concall was that they were ready to start commercial production as soon as they got the approval.

Short Notes on Q3FY24 Results.

  • Very poor showing across the board, significant margin compression due to increased freight costs.
  • Revenue at 40 Cr, 12% de-growth YoY, EBITDA at 4.72 Cr, 52% degrowth YoY.
  • EBITDA margins at 11.81%, down from 21% last year.
  • PAT and EPS down ~77% YoY.
  • Despite the headwinds in Q3, management expects the business to improve in coming quarters.

Capsules Segment

  • Struggled with exports market, a significant factor in poor performance.
  • Currency issue, increased logistics and freight costs (due to disruptions in the Red Sea) and deferred shipments impacted exports.
  • Raw material pricing remained stable throughout the quarter.
  • Outlook for capsules business remains robust, optimistic about its continued growth.
  • Outlook for the coming quarters is promising post resolution of logistic issues.

HPMC

  • First HPMC line integration completed, and dry runs have successfully concluded.
  • Poised to commence commercial production shortly.
  • Plan to initiate the installation of the second and third HPMC line in due course of time.

API

  • Same status as the last quarter.
  • Still in the process of obtaining the final clearances from the Pollution Control Board and the license from the Drug Department.
  • “A meeting scheduled for the coming week holds the promise of a favourable resolution.”
  • Plan to commence the manufacturing of select intermediates, scaling up to APIs production after receiving the necessary licenses.

Disc. - Invested

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Not according to their recent investor presentation, but they do state a meeting is scheduled soon and they are hoping for a favorable resolution.

This is what they stated during the last call during Nov. They quantified it to 3 to 4 weeks for the PCB which was delayed due to the regime change. But there were no blockers for the drug license. Surprising to find both pending till now.

Disc: Invested - Second biggest position

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Yes, this is concerning. But bureaucratic processes in India can be complicated so I’m okay to give it another quarter. They say they should have it wrapped up in a week and hope for a positive resolution, this should be wrapped up soon. Otherwise will reconsider staying put.
Meanwhile, expecting some correction, provides a decent oppurtunity for entry, given the overall market is pretty out of whack w.r.t valuations

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I think capsules business may take 3-4 more quarters to improve margins. Installing HPMC lines may not boost the neither revenue nor margin due to poor demand of the capsules in the market.
I feel they are intentionally dragging the commissioning of HPMC lines as they are not able to run the existing lines at 100% capacity due to poor demand.

Even after few quarters 20% margins in the capsules business is seems to be unlikely, we may expect an avg 15% margins.

API is very long way, we may not see any significant contribution to bottom line in FY25, we need to wait long time for recovery in the numbers & stock price as well.

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PCB approvals are electronic now. Though you do spend some bucks in getting it, It is not as tough as it used to be. Seems it will be tough for chemicals/ Pharma companies given the stuff they are dealing.
Same, Staying put for another quarter and begging dear god that they don’t come up asking another week.
Today was a 6% drop, Waiting to see if it will drop anymore and would top up (≈ 300) will be sweet.

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