Sequent Scientific - Indian story in Global Animal Pharma Space

Stock Opportunities
1

The Story

  • It is a pharma company owned by the promoter of

Strides Arcolab Ltd ( STAR), involved in CRAMS/API space in human and animal health

  • Largest producer of Vetenary Anthelmintic APIs, has strong alliance with Orffa BV, Supplies anti-malarial API’s to CIPLA.
  • Post takeover by Stride Acrolab promoters, it has grown 5 times (to turnover of 355 Cr) in last 5 years (via organic and inorganic route).
  • **Big time expansion **: Completed expansion of Mangalore unit on human API’s; Speciality chemical divison expansion will be done by second half this FY; Entering into Penems, Penicillin, Oncology, Phyto Pharma, Herbal extract through capex of 164 Cr.USFDA standard facility at Panoli will start contributing from next FY; 1st phase of Penem project will be complete by end of this FY (through 84% subsidiary); Cultivation of Artemisinin plant has started at Africa via another subsidiary (who leaf are used for making anti-malarial Artemether drug). USFDA of Managlore facility expected at the end of this FY.
  • **Bad patch **: Not so nice year for Sequent. 2 separate accident in 2 different plant, few employee’s death, production stoppage for months. Profit nosedived from 15Cr/qtr to 1.5Cr/qtr. Forex loss take it to negative territory of -15Cr/qtr. Past looks black for this company, so no point looking ROE/ROCE.
  • Uncovering the Mystery : Even with the bad patch that this company is going through, the stock price is moving up day-by-day, hitting 52 weeks high. The reason being around 88% of the stocks are held by Promoter(56%) and HNI(32%). To add to it promoters are buying from open market, by selling their stake at Stride Acrolab. The promoters are subscribing 22L warrants through a preferential basis, taking their stake to 65.47%)

Conclusion:

  • **Positives : **Good/Experienced promoter, low floating stocks (not more than 5-6%), Big names like Prof Manekar’s family member and Satpal Kattar, Promoters subscribing 2100K share on a preferential basis to hike their shareholding by 9% to 64.5%
  • **Negatives **: Huge loss last quarter (but still stock touching 52 weeks high !!!), next 1-2 quarters may be not so good. Company can’t be judged by traditional matrix like PE, ROE, ROCE.

Reference:-

3 Likes
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Hi Subhash,

What is the need for preferential allotment to promoters ? Isn’t it red flag ?

Regards

Raja

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Hi Raj,

I am not a big expert on warrants and rights, its pros and cons. This is what I can get from BSE site. Seems like the resolution is passed at last AGM.

Sequent Scientific Ltd has informed BSE that, pursuant to the resolution passed by the shareholders of the Company at the Annual General Meeting held on September 26, 2012, the Company has allotted 21,00,000 warrants at a price of Rs. 120.75 per warrant (including a premium of Rs. 110.75 per warrant) convertible into 21,00,000 equity shares of Rs. 10/- to the following Promoter Group entities: …

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Hi Subash,

I am no expert either. But what i understand is this, supposing we as public held 30 (30%) out of 100(100%) shares issued by the company before this preferential allotment.

i) Now by virtue of this allotment of 9 (9%) extra shares directly to the promoter, the public now hold 27.5% of the company and the promoter owns 72.5% out of total of 109 shares. This just an example.

ii) The earning will also be shared by 109 shares instead of 100 shares. So, EPS will go down by that factor.

iii) Because the promoter got thepreferentialallotment at 110.75, when the market price is at around 140, it is an indirect loss to the company and the public share holder. Hence it is not considered as a great way to raise money for the company.

The excuse from promoter for doing this could be the ease of raising capital without much delay involved in regulatory process.

The right’s issue differs frompreferentialallotment in the respect that, even public share holder get’s anopportunityto participate in the process of buying the new shares (in proportion to his existing holding) and hence can protect himself from the dilution in his holding.

Regards

1 Like
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Hi Raj,

Sequent was quoting at 110 just a month back. It has rose to 140 level in a month time. So one can excuse the promoter in this case, that is what I feel.

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Hitesh/Donald/Ayush/Rudra/Senior Valuepickrs,

Please give your feedback on this stock. Planning to move it to amongst the top 5 picks in my portfolio.

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Strides Arcolab mulling sale of generic pharma to SeQuent

Strides promoters, who are personal investors in SeQuent, explore buyout options if it decides to offload generic pharma

Bangalore-based mid-sized and deal-savvy Strides Arcolab may be exploring the possibility of divesting its generic pharma arm to SeQuent Scientific Ltd. Strides Arcolab promoters Arun Kumar and KR Ravishankar are personal investors in the much smaller cross town peer, Sequent.

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Due to low conviction on it, slow and steady falling of its share price, I had got rid of last drop of sequent from my portfolio.

And bang! sequent 20% up today !!! I doubt anyone can match me in having a solid track record of selling stocks and than stock having a real good time :slight_smile:

4 Likes
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“The Stock Market is designed to transfer money from the Active to the Patient” - Warren Buffett.

Not trying to put you down since this is one lesson I’m still trying to imbibe myself :wink:

A little surprised though that you can go from making(or considering) Sequent a top 5 stock to having low conviction in 1 month.

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Hi GreyFool,

The story of Sequent seemed good to me. The fundamentals, well without any solid number to back up, seemed in determinant to me (its a turnaround story). When it was going up and up, I added it in a staggered manner. When it went down and down, I didn’t have the fundamental analysis to determine what is its base price. So I sold it again in a staggered manner. a zero sum game :slight_smile:

The real issue with me lies in with my “just 1 yr experience” in investing, and my super-activeness in not letting me loose any money.

I have decided in my brain not to loose any money in stock market, even if the price is 10% lesser return on CAGR basis. In a falling stock market condition, where even FMCGs/Fundamentally-good are going down, I will sell all my stock, pay some short term tax to govt, and seat idle with the cash till the market start upward journey, or find some cheap stock to bet on. Seating idle when I am loosing 1% of my portfolio daily basis is a strict no-no for me, I don’t want to suffer “frog in slowly boiling water syndrome”. I usually have 5-10% mental stop-loss for all of my scripts, which when triggered it is a sell for me. (exception are cases where I have super high conviction based on fundamentals, or some senior folk has strong conviction based on a valid point).

For the case of sequent it went from 20% gain to 7% loss in a small time, and got kicked out from my portfolio. No interest/positive feedback from senior folks also dampened my conviction. The proceeds went to stocks like Hawkins, so no regret on selling part. It is just the statistics of stock rising post my sell, which intrigue me. (Example : Thangamyl, Divis Lab, TBZ, Sequent).

You see, it is real good not being too sure of oneself; self-doubt is an awesome characteristics in stock market. Countless folks have lost money by being too sure of themselves.

As of change of sequent from top 5 holding to get rid of in one month is concerned, I am bit too fast in taking decisions. I follow a very simple rule, allocation of a stock in my portfolio is directly proportional to my conviction level, nothing more, nothing less. If some stock looses my confidence it gets ejected from my portfolio in no time.

What I am trying these days is to analyses good stocks more details and trying to develop convictions in them. So far I have developed solid conviction for Kaveri, Mayur, Astral, ARBL, Hawkins (post issue resolution), Unichem and planning to have them for long term.

Regards,

-Subash

“The Patient” - Warren Buffett. _

;))

1 Like
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I firmly believe, that facing a harsh bear market ( like that of Jan 2008-Mar 2009) very early in your investing career makes you more mature as an investor.

A bear market will have many intermittent rallies followed by even steeper falls. One does incur opportunity costs but equities are inherently for long term and one should not bother about short term 5-10% falls.

One must exit a stock because of a) deteriorating fundamentals b) relatively better opportunities one might switch to. Just basing your exits on price corrections may not be prudent.

From all the Diwali chatter from stock experts, one line which I liked from RJ was that he is buying stocks now with 2020 in mind and 10-15% corrections are totally irrelevant.

As RJ famously told, market always gives opportunities to every buyer and seller. Patience is the key.

… stock,… journey,

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Fully agreed on bear market making you a mature investor. So is with patience. But on exiting a stock, I want to add another point

c> On reduction on your conviction, whatever the reason be it.

If you have conviction, the rule is add on dips. You are entering a stock with not much conviction, but with expectation of some quick gain, than it is better to exit without incurring loss.

These days I am big time into reading investment related books (6 investing book in a row, 7th will be completed today). One thing I learn is that there are 100s of ways in which one can invest in stock market. So one need to find out ways his own way (and own mental models if one follows Charlie’s mental model approach). So there can’t be just one correct way of doing investing.

I am 100% convinced that my situation is totally different than RJ, and hence no point following his approach. If he want to buy some stock, it will go up by 20-40% just because of that, so why care about 10-15%, hence RJ has to have a super long term investing horizons. Why RJ invests in DB realty, that too for a short period is an enigma to me.

Regards,

-Subash

In a falling stock market condition, … I will sell all my stock,… and seat idle with the cash till the market start upward journey, or find some cheap stock to bet on.

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On a lighter note…Subash ji… Nxt time you are about to sell a stock… Just let me know… :smiley:

Will certainly buy it as a short-term trade…

:))

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Rohit-ji,

There is at least one instance where I sold a stock and it fell 50% within a month or so. The name is “Cochin Minerals”. So your approach might not be a safe/perfect one :frowning:

On a lighter note…Subash ji… Nxt time you are about to sell a stock… Just let me know… :D

Will certainly buy it as a short-term trade…

** I time:))

**

15

I am an investor in this company too and i have a doubt regarding their capacity addition. Can someone please tell me if all their expansions would be onstream by FY 13 end of FY14 end?

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Read the end paragraph, which talks about Arun Kumar’s ambition in taking sequent in the same growth path that he had taken Agila before selling it.

Thinking of re-entering in both Sequent and Stride after reading it.

3 Likes
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Nice article Subash.

But regarding Sequent, the numbers aren’tpointing it to a screaming buy. Yes, it may be afuturistic bet butwe can’t bet on it big timelike 10-15% of portfolio.

Strides can’t have same kind of growth as Agila had as market size is lower (even the article mentions that) &even aftera huge dividend & ethical promoters, we will end up with anotherPiramal.& Piramal has underperformed our Mayur, Atul Auto, Cera etc because good business is better than goodmanagement.

1 Like
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Great set of Q1 nos. after long time. Finally into black now as promised by the promoter. Equity size has become bloated so will take 2 yrs before reasonable EPS is expected.

Disc: Holding Sequent along with Strides in pharma portfolio.

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Have stopped tracking so don’t have any comment to offer. Promoter’s empire building habit irked me the most. It has got large equity base and more complex operations. I made 50% in few months and got out. Story is good but will take time to play out. We have many better options in pharma universe.

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I think the operations of the company are finally turning around - Look at this quarters results. It is finally back in the net profit. We should see this becoming a multibagger fairly soon.