Caplin Point: An account of intangibles
Pharmaceutical Share Listed On Indian Index
Introduction
The company was established in 1990, initially producing ointments and other dermatological products. The Company was listed in 1994 following its Initial Public Offering (IPO) which was oversubscribed 117 times, the proceeds of which were deployed in setting up a manufacturing facility at Pondicherry. Thereafter, the Company expanded its product range and increased its production capacity.
Business Model
Following are some of the highlights of its business:
- While 75% of its revenue is derived from non branded generics, it has been expanding its branded generics. As of 2021 branded generics contribute about 25%, much higher than 5% in 2012.
- Only pharmaceutical company to outsource 55% of the product manufacturing to India and China to avoid any cost escalation and currency fluctuations.
- It cashes in 87% of revenue from Latin America and remaining from Africa and USA.
- Company has heavy predilection towards R&D, making up around 6–7% of operating revenue (₹100 Crore as of last financial year).
Growth Drivers
Following would be the main drivers of the company in upcoming years:
- Company is foraying into the oncology business by targeting the first batches by the end of this year. The oncology industry is expected to reach $222 billion by 2027 growing at CAGR 7.2%.
- It is also emphasising on backward integration. Most pharmaceuticals have to stay dependent on China for key starting material and API (Active Pharmaceutical Ingredient). The company is targeting backward integrated supply chain with its own APIs for 70% of all filings in the US by 2024, a critical differentiator for Generic Injectables.
- Company has also shifted its focus on key regulated markets like the USA, Australia and Brazil. In fact, it has made some significant developments in the US market by launching 4 drugs under ANDA. It aims to get approval for as many as 30 ANDA’s.
- Approval in the USA would fast track its approval process in other regulated markets, allowing easy global penetration of its products.
Brief on Financials
Fundamentals
Profitability and Revenue
The company has remained profitable as far as the record goes along with a linear increase in operating profit margin. OPM is expected to rise further as the scale of operation increases and backward integration (KSM, API’s etc) of supply chain comes into play. Likewise, Revenues have been increasing at an exponential rate with ₹300 crore of sales in last quarter itself (equivalent to annual sale of 2017)
Debt and Liquidity Profile
Company has a low debt of around ₹18 crore. Debt/Equity ratio stands at around 0.02. In short, it is too low to be concerned about. Liquidity profile of the company is robust with approximately ₹450 crores of cash and cash-equivalent holding. It’s enough to cover the upcoming interest cost and immediate capital expenditure requirements. Looking at the free cash flows (Operating Cash Flow — Operating Expenses) of the company one can be assured that the company won’t require any external financing need unless it plans to exercise huge capital expenditure or acquisitions. Moreover, the company has set a goal of ₹1000–₹1500 crore cash surplus in the next 5 years.
Research and Development
Caplin ranks #1 in India across all industries, for R&D spend as a percentage of Revenue on average in the past 5 years. This depicts the dedication of the company towards innovation and ever evolving needs of modern sciences. The series of plots might give a better picture. Company has endeavoured to keep the R&D to revenue percentage at a healthy level. Indeed, there’s a slight increase in spending in the latter part of the decade. The team strength in the middle further reinforces the R&D commitment of the company. The extensive R&D expenditure has exalted to 16 approved ANDA’s and 45 in pipeline. The combined portfolio can unleash a market value of more than $3 billion (in the USA alone) by the time all projects under pipeline get approval.
Dilution
This aspect is often neglected by investors. They are mostly enticed by the “low price”. But is the “low price” really low? Take for example a company has 100 balls to offer. So, it releases its IPO by floating 10 shares in the market. Now you as an investor buy a share with a mindset that you would get 10 balls for each share. You hold onto that share with a hope that company would some day have 1000 balls. But a post-IPO company realises that it needs more cash without debt. So, it floats 10 more shares in the market to raise money. But now you, an investor, who has 1 share now has a claim over only 100/20= 5 balls. In effect, you have suffered a loss of 5 balls. So, when a company raises equity it dilutes the earnings of current shareholders. Let us see if caplin point has diluted its earnings. It’s negligible!!
I hear people calling Yes Bank a cheap share and so has a better chance to give huge returns. Sorry to offend those people but it is not a cheap share. It has a market cap of ₹30000 crore and equity capital of ₹5000 crore, 300 times greater than that of Caplin Point. It is a highly diluted share. So, if Yes Bank investors are expecting to double their money, they have to wait until someone infuses ₹30000 crore rupees.
Technicals
The stock is trading at 27.1 PE, which is higher than the market PE of ~20. But, the PE is not an accurate method for pricing earnings. The net cash (less borrowings) stands at around ₹432 crores. Then, the net cash per share is around 432 divided by 15.32 (Number of shares in the market in crores), is equal to 28.2. Further, we can also consider 20% of the book value per share, which is 20%*138 equal to 27.2. Now, let us subtract 926 (current price) with 28.2 and 27.2, which is equal to 870.6. The amount one would pay for a rupee of earning stands at around 870.6/34.18 (Current EPS)~ 25.47. There might be innumerable interpretations to PE but Peter Lynch suggested that PE should be equal to or less than the expected growth of EPS. Here, PE is more than the average growth in EPS in the last 3 years which is equal to 19%. Buying at 704.82 would be justified for people looking for a margin of safety, an idea first proposed by Benjamin Graham and actively followed by Warren Buffet and Charlie Munger. Amateurs should definitely follow the margin of safety as that’s the right road but don’t take the preciseness of numbers too seriously. Any small deviation from the precise value should suffice. Personally, I am not particularly a PE snob and try to look at a broader picture.
Final Thoughts
I have met many people in the small span of time I have been in finance. They go about shopping stocks more recklessly than their house groceries. They importunately bargain with the fruit vendor until he brings down the price at par with his cost. People find high upward volatility in a stock and leap onto it at the first opportunity they get. It is pure gambling, worse than tossing a coin. When you are buying a company, you should buy it with the mindset that you are a business conglomerate looking to acquire the company of interest. Buy it as if it would be your last acquisition or last company you would invest in. So, I would suggest all my readers to go back on the board and research extensively about this company until you are sure that this would reap you monetary benefits in future. Don’t take my word for it. Money is yours, risk is yours. I am just another blogger hoping to provide a sound financial advice.
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Thank you for reading!!!!!
