RPG LIFESCIENCES - Change in Governance and Performance

Q&A: Questions & Answers Company Q&A
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Would like views from the investors.

Disclosure - I have vested interests in the stock from lower and current prices too.

Reasons

  1. Insider Buying. Promoter has increased stake by more than 5% in last 1 year.

  2. Good Land Value

  3. Low debt

  4. New CEO who is experienced.

  5. See the company changing governance. Look at Ceat as an example from same group.

  6. Last quarter results also show the change.

Negatives

  1. Mgmt track record has not been good in the past

Technically the stock has also crossed 5-8 year highs.

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Technically the stock has crossed multi year higs around 120 levels.

Fundamentally some of the negatives I feel are as follows

Company has just turned around and we need to see how it goes in next couple of quarters. If next quarter is poor then all the joi-de-vivre would vainsh in no time.

company has poor profit margins. How it scales up these profit margins needs to be seen.

Past track record has not been too encouraging. Where other companies have made hay this one seems to be stuttering snd spluttering.

I think the one trigger which can play out is outright sale of the company or else some kind of genuine turnaround happens in the company’s fortunes. Since we are in a pharma bull run any positive news are usually cheered with vigour. How long this vigour lasts is anybody’s guess. But having said all that the technical picture seems good.

disc: no positions.

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Just putting some more details as to go with the guidelines of having a 3-4 para thesis.

Market Cap of Co = 250-260 cr.

Land Value = 150-200 cr. as they sold 30% of land at 76 cr - Link to that - http://www.vccircle.com/news/real-estate/2013/06/06/rpg-life-sciences-sells-leasehold-rights-land-navi-mumbai-maruti-suzuki

The sale proceeds were used to repay debt.

Good possibility that they may hive of land in next couple of years.

The New CEO - http://www.business-standard.com/article/pti-stories/rpg-life-sciences-appoints-c-t-renganathan-as-its-md-115010200196_1.html

He was earlier With Glaxo Pharma.

Continuous Insider buying by Harsh Goenka - http://www.bseindia.com/stock-share-price/stockreach_insidertrade.aspx?scripcode=532983&expandable=2

Increase in stake by 4% in last qtr and was at 53-56% is now 66% of shareholding.

The last qtr results show a marked improvement with 4.5 cr pat and 66 cr sales.

They had received a non compliance notice from US FDA which takes 2 yrs for a retry. Not expecting it to happen but there is scope for luck in this part.

So at 250 cr mkt cap and 250 cr sales and turning around with last qtr pat of 4 cr gives shows promise. Also the land holding and that too being sold and used to repay debt shows further land sale money may be put to proper use.

Now coming to the governance and performance part.

RPG group is now with Harsh Goenka.

Ananth Goenka his son has taken charge at Ceat.

The change in Ceat was seen in last 3-4 years. Earlier the group increased holdings from 45-47 % to 57% and a recent QIP has reduced it to 50% but in the same span alongwith the tyre sector turning the stock has gone up 10 times alongwith performance and re-rating.

The company has been around for 3 decades and no major growth !!

So my bet is the old mindset is changing and management is getting professional.

At a valuation of 200-250 cr with land worth 150-200 cr gives me lot of comfort alongwith results picking up.

Although i do not understand the Pharma business this is a bet on management changing stance and buying it at a valuation where my capital loss risk is not huge and am ready to wait patiently as well as build up on the way up or even exit on review after 2-4 qtrs.

Would love to hear views from Pharma people. As per a little feedback they have started hiring more aggressively.

Again a disclosure - Have a decent exposure to the stock from 110/150. So my views will be highly biased take it a with a ton of salt :slight_smile:

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Meanwhile there is an Analyst meet in Mumbai on June 8th. If possible will attend if anyone else is attending would be good to get feedback.

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@nooreshtech any idea how it compares with Mangalam Drugs? Mangalam is a leader in anti-malarial APIs with more than 50% market share and now entering Anti-HIV, for which it has already got approval for one of the APIs. This year they have shown remarkable turnaround performance and valuations wise its in single digit PE with sales at 220cr and market cap of just 56cr. Technically even better than RPG Life in my opinion. Not that there are no short comings in mangalam but still given its gross undervaluation and a niche skill set and changing fundamentals, i think mangalam deserves a good look. I did a comparative study earlier between rpg and mangalam and was tilted towards manglam. have a decent exposure in mangalam but still contemplating whether to add in big quantities as rpg is still lingering on back of my mind, purely because promoters have been adding quite a bit of rpg, though i still feel promoter addition is the only interesting point in rpg life.

Views invited.

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Mangalam’s re-rating going on…more than 50% up since we discussed it last time

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I think RPG Life fits well in classic “cigar-butt investing” of Ben Graham. Here is a company with market cap of Rs 300 Crore having land value of Rs. 200 Crores and annual sales of 300 Crores. New CEO bringing in focus on asset utilization and better profitability with possibility of upside due to US FDA approval makes it really “heads I win. tails I don’t so much” type of deal.

Having said that, their past gives very less confidence as they were mediocre company for most of its existence with lack of focus and forming small part of large group with focus on tyres, power transmission and software. Since this is relatively small standalone business in large group of companies, turning around this company and selling out to other pharma biggie could be option explored by the group.

Disc : I am invested in this company from lower levels so my views could be biased

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Great Q2 results. Turnaround story continues. Profit of 2.56 Cr in Q2 FY 16 vs Loss of 7.39 Cr in Q2 FY 15. No wonder Promoters have raised their stake from 61.83% to 66.79% in last one year :sunny:

http://www.bseindia.com/corporates/anndet_new.aspx?newsid=4f6eb3f0-95e3-4203-839e-67bf818418cb

Disc - invested

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Stock has hit upper circuit of 20% on two consecutive days with daily volume around 10 times average per day volume for last week/month. Any idea about what is happening?

Disc : invested

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The reason for stock hitting high for last few days -

http://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/harsh-goenka-led-rpg-group-to-enter-skin-care-segment/articleshow/49935394.cms

As per the news, RPG is planning to enter Over-The-Counter (OTC) skin care segment through RPG Life Science to diversify its portfolio away from regulated markets and products. RPG group is trying to transform itself for past 2-3 years. It started with CEAT, followed by KEC International then Zensar and now RPG Life Science!

No wonder street is re-rating the stock considering the potential !

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J2EE, hope you still holding on to Mangalam… Great pick…Is it good to enter at this level?

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yes, i am … although booked part profits between 400-420 (lucky that’s all) but i am still holding a major chunk. I am very bullish on the stock and if it were to touch 30 day moving average i would be buying back my quantity (and ofcourse if i do not get anything more interesting). there is a good chance that today or tomorrow it could stop its LC journey and if not then 30 day moving average could be a great bargain buy for new guys.

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EUGMP certification for Ankleshwar plant. Clearly turnaround is on the way

http://www.business-standard.com/article/markets/rpg-life-sciences-gains-on-getting-eugmp-certification-for-formulation-facility-at-ankleshwar-116040600166_1.html

Expecting US FDA approval to come through by end of the year. With new leadership putting in place strategy backed up RPG’s group new focus on profitable growth, I think this company has a long runway ahead.

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Aiming for 90% business from formulation business after selling biotech unit to Intas Pharma for 25 Crores

I like the company bringing back focus rather than trying too many things.

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Excellent results . Quarterly sales up by 28% and profit up by 4 times. News of company acquiring 7 brands from Sun Pharma, tieup with US Company Biophore for APIs and keeping 5 year target of 1000 Cr (Fy 16 290 Cr) Lots of news on this counter pushing the price up by 25%+ in last 2 days

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/09674E96_EDB4_49CB_BE46_561B992428E7_165047.pdf

http://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/rpg-life-sciences-inks-pact-to-acquire-sun-pharmas-7-brands/articleshow/53418697.cms

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Q1 2016-17 PAT of 9.87 Cr vs entire year 2015-16 PAT of 11.62 Cr! Perfect case of turnaround story. Although management was clear that there was one time profit in Q1, I would expect full year PAT to be around 25 Cr. New CEO hired about 1.5 years back has started showing results.

I got chance to attend their AGM and met their President for Specialty Sector. See his profile -

When asked about why it is taking so long to resolve USFDA issues for plant, he was honest to accept that company had dropped plans to go after US market. New leadership argued their case successfully that no Indian pharma company can do well by ignoring US market. So now USFDA plant approval is back on agenda. But since they lost the momentum, it will take another one year to be ready for approval.

It is refreshing to hear it first hand. I feel company has right leadership in place and going by the recent results as well as announcements, I think this is just the beginning for this company. It will be interesting to watch how they execute the strategy. But if they do, this company would be much higher valued than current market cap of 680 Crores.

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Forgot to add my disclosures

I am invested in this company form lower levels and no transactions in last 6 months

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Excellent Q2 results. Sales up 22%, PBT up 39%, Six consecutive quarters of growth. International formulations business grew 124% during the first half of the year on the back on new customers and new approvals. Company is truly on the path of turnaround.

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HDFC Securities came out with buy report with target price between 545-658 in next 3-4 quarters

HSL PCG - RPG Life Sciences - 19 Dec 2016.pdf (391.2 KB)

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the new management shows lot of promise, but yet to see action…the numbers do not look good.

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/8a5aca23-f10b-4c59-bba0-db4c76d7ec4d.pdf