As I mentioned earlier, my allocation is based on business analysis and margin of safety while making an investment. I have already mentioned the upcoming triggers and various moving parts in the business. For a stock to move it needs a) triggers (news, events, etc.) b) improving business and underlying cash flows
Cash flows comes from making good allocation of capital in the business.
Please study the business in detail, from your this statement alone, I know you haven’t studied the business in depth. Strides has 33.3% of stake in Stelis. Stelis doesn’t need to raise any further rounds cause cash flow from vaccinations alone will make it opex breakeven and even put some excess cash for itself to reinvest in the balance sheet.
At the time of demerger, Strides will retain a minor stake (less than 3 to 5%) to in Stelis to recoup its investment back. Similar to what Sequent did with Solara.
For every 3 to max 5 share of Strides, the holder will get at least 1 share in Stelis.
Market participants do not realize the value of a pure play biologics CDMO business. Please study Wuxi Biologics and Samsung Biologics in details and what’s happening in this space globally.
The 2 min version is
Majority of biologics are coming off patent in next 3 years → This has led to a rise of virtual pharma companies that are engaged in production of biosimilars, biogenerics and biobetters → Advancements in CRISPR and biotech also has enabled to create more novel biologics → all this leads to a rise in demand for regulatory approved high end sophisticated biologics manufacturing centers such as Wuxi, Samsung and Stelis. There isn’t a single pure play biologics CDMO in India, a country know for its chemists and biotech grads globally. Syngene comes close but they largely do non biologics work.
Costs of researchers and manufacturing in India is half of what it is in China and 10th of US.
Wuxi has a backlog of 3 years and $11 Billion USD and this backlog is growing at double digits every year. Such is the demand for biologics CDMO in the world.
Here is Arun Kumar from last Strides conference call alluding to the same.
Now imagine such a business gets tonnes for cash flow maybe of a once in time unprecedent business opportunity like vaccine manufacturing for Covid.
Here is Arun Kumar talking about the need for additional $100 Million for Stelis (this was pre signing their deal to manufacture Sputnik)
Sputnik single order for 200 Million doses alone will give about ~$400 to $500 Million in sales to Stelis. At even a 20% net profit margin, this easily fulfils their need for incremental capital. And I am being very conservative with these assumptions.
I expect Stelis to get additional orders for vaccines, even bigger ones after this order goes through. For this you need to monitor geopolitics.
EU and Covax desperately needs additional vaccines. The only hope right now esp. after the problems with Astra Zenca and Serum Institute, is Sputnik and the Chinese vaccine. US who sponsors majority of Covax will never let China supply its vaccine to the initiative. US companies like Pfizer and Moderna have their own manufacturing issues to sort out and have a backlog of 2 years. Novax is tiny. That leaves us with Sputnik.
EU very conveniently delayed the grant of emergency use to Sputnik just a day before Biden was supposed to meet Putin. The meeting went well and both nations agreed to establish embassies in respective nations again. This was a signal that US would not oppose Sputnik’s use at a global level which clears a path for EU approval.
The moment EU approves, Sputnik demand globally should double, which in turn helps Stelis secure more orders for the vaccine as its the only one till date from India to send a validation batch to RDIF and only company to manufacture the vaccine at large scale. You can see this with the orders that were placed, Stelis got the order for maximum doses from RDIF.
So the vaccine opportunity is good enough for Stelis to fulfil its future investment needs without raising any additional capital.
Second most important trigger, more important than demerger itself is the PE buy out. An announcement by KKR or Carlyle buying Strides will instantly double the valuation of Strides simply cause its trades at 1.5x sales and less than 1x FY23 sales. Now any PE firm likes to buy at least a minimum 51% of the business, but promoters in Strides only own ~29% of the company. So where does the rest 22% come from? It comes from directors and members on the board and other related entities that have single digit stakes.
A quick look at recent selling in strides will show you directors and related entities selling in open market. Directors who have never sold a single share since inception of the company. Usually someone with substantial stake sells via bulk deal to get a better price but none of these transactions are made via bulk deal. Why? cause bulk deal will reveal the identity of the buyer which is enough to raise the prices by 10-20% and cost the buyer 100s of crores more.
People are far focused on cashflows and valuations and who is selling and what margin will be next quarter and next year instead of focusing on triggers and events and tailwinds and industry structure which have considerable impact on stock prices. Investing is not just about number crunching, that’s maybe just 10% of the job, its more about human behavior, geo politics, history and business structures.
Coming to my allocation. I am a concentrated investor. I don’t believe in diversification and modern portfolio theory and having allocation to debt etc. Being an insider who has worked with an investment bank, I can tell you this industry like medicine industry, is purposely made more technical, filled with jargons and theories etc. in order to squeeze as much money from customers as possible and keep them from studying it in detail by making it unnecessarily complicated. Concentration is what made wealth for all the big names like Rakesh Jhunjhunwala (till date has majority of this net worth in a single stock - Titan), Munger and Buffett made wealth by allocating big to opportunities that were sure shot (40% of portfolio was once invested in American Express), Stan Druckenmiller made George Soros a billionaire by making concentrated bets with his money and breaking the pound, Monish Pabrai who famously followed Value Investing, revealed in a recent interview how he has accepted that concentration is the real way to make wealth and gave example of Nick Sleep and Qais Zakaria who used to run Nomad Capital and now have all their wealth in just 3 stocks. The guy who made Chewy, sold his company and put his entire net worth in Apple stock, Vijay Kedia became a multi millionaire by buying and limiting himself to just 4 stocks.
My investor journey is aimed along those lines. I aim to someday have a portfolio of just 4 to 5 stocks with a majority of my net worth in.
So don’t go by my allocation, putting 25% of my portfolio in a single stock just tells you that I am crazy or have understood the business well or maybe both. I believe its the latter.
Hope this helped provided some clarity and helped you give some direction into how to study the Strides business.
If I did, I would have asked them for a 1:1 swap ratio. Since its not in my control, I do not worry about it.