Capital allocation decisions are to be assessed against alternative options available at that point in time. Every large company has multiple products, product lines, customer segments, geographical regions and so on. Not all of them yield the same margins. If an existing high margin product line becomes a rigid benchmark for future capital allocation, businesses will struggle to grow.
Suven is debt free and sitting on surplus cash. Capital needs of CDMO business have been provided for (capex announced earlier), all from internal accruals. Thus, the Casper acquisition does not starve CDMO of money.
Casper is located in a SEZ and has long-term customer contract to buy all its production. These are valuable intangibles not visible on the balance sheet. Once it clears FDA inspection, Mr. Jasti says it can generate revenues of Rs.300 crore per annum with a potential to be scaled even more. Mr. Jasti has said he is paying only for asset value (Rs.155 crore), not for business value. He understands that the business value is much higher, even with ‘me too’ products. The acquisition also helps to de-risk the business from excessive dependency on CDMO. In FY21, top 2 customers constituted 45% of Suven’s revenue.
An opportunity came his way and he seized it. Most businessmen in his place would have done the same thing. Casper is thus a step forward.