CAPLIN POINT LABORATORIES LTD - ANOTHER AJANTA PHARMA IN MAKING ?

    
 

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Caution :

Contents of this posting mainly based on informations sourced from publicly available documents,data collection and verification through private sources and certain assumptions.Due to some practical difficulties I could not verify the authenticity of  few informations provided here ,hence no guarantee for its accuracy and  prone to higher level of risk. But, to the best of my knowledge , the given informations are correct. Before acting on this recommendation ,do own home work and take decision only thereafter.

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Let us start this new year with a prayer for a good 2014 .Last year SEBI play the spoilsport by the introduction of Periodic Call Auction .This time,by god’s grace ,they realized the drawbacks of this mechanism and already declared many relaxations which is expected to bring lot of relief to small and mid cap investors going forward .

Pharma and IT were the out performers in2013.Since , political uncertainty is  still looming,investment in these sectors are still relevant.Among the pharma pack ,Ajanta Pharma was the biggest gainer in last year.It out performed all biggies with a wide margin. But if we take the top selling drugs in the country it is hard to find any of the products by this company.Then what is the secret of this out performance ?.I believe it is only because of the sterling performance of its ‘Kamagra ‘ brand in overseas markets. This brand gained a sizable market share in Male Erectile Dysfunction segment along with the VIAGRA  brand of Pfizer.Frankly speaking I am not aware about the complexities of manufacturing this product ( Sildenafil Citrate)  ,but it is a fact that only a handful companies from the listed space  making this product , even this segment is growing at a fast pace with good margin.

                                                                                             My search to find out another company active in this segment from mid cap space  ends in a small Chennai based company named Caplin Point Laboratories. Even though this  company not specifically claiming as a producer of this product,  based on the available information ,this is one of the largest exporter of the generic of Sildenafil Citrate from India . Company supplying large quantity to Latin American and African Countries where product registration is enough to sell medicines and regulatory requirements are not tough and also  a preferred supplier for online drug stores .If you are ready to spend few hours in internet with some academic interest ,you can easily gather enough proof for  company’s supply of Sildenafil Citrate through these channels . There may be some solid reasons for the  non disclosure of this fact by the company and I believe they will disclose it once they get a USFDA approval for their new plant which is nearing completion.

                                                                                           Another interesting fact about this company is -  it is a debt free company and getting money in advance for supplying medicines from its distributors ! .Have you ever heared about such a business model in case of a small pharma company in India  ?.More than that ,company claiming that the funding of Rs.75 crore for the new plant is coming from such advances and internal accruals .Since there is no proof for its manufacturing of any critical life saving medicines ,I believe  ,advance payment is only because of the supply of sildenafil cytrate which is in high demand from suppliers to online stores. Apart from this product ,company also exporting many other products to countries like  Guinea, Guatemala, Angola, Mali ..etc  .Company selling such products under its own brand name in these countries .(OTC Product Advertisement HERE ). 

On the financial front ,company is growing steadily in past few  years .Its top line improved from Rs.60 Cr to Rs.122 Cr and net profit galloped from Rs.3 Cr to 14 Cr in last four years.Management of company rewarding share holders proportionately in these years which distributed a dividend of 25 % in latest financial year. Company is now going through a massive capacity expansion program .As part of this ,company is in the process of setting up a  state of the art injectable plant which will cater to highly regulated markets like USA , EU ..etc .It started construction in 2012 and and planning to complete it in three phases .First phase of this plant is expected to start trial run in this month itself .This facility is mainly for sterile injectables and prefilled syringes .There is severe shortage for sterile injectable facilities across the world and big MNC’ pharma players  are in a hunt for acquiring quality assets in this segment.Mylan’s recent buyout of Agila division of Strides Arcolab at a whopping valuation is an indication for the premium valuation for Sterile injectable facilities  worldwide  . Pre-filled syringes is relatively a new concept which is gaining acceptance and potential is very high. Company claiming they have already entered in some agreements with Brazil based firms to distribute products from this facility . This may be a temporary arrangement till the company get the permissions of USFDA and UKMHRA for this facility .Caplin point also expanding its existing manufacturing unit at Puducherry by adding facilities to produce Suppositories, Soft gelatin capsule and Penems.This is also expected to to start production in the second half of this FY. Company already recorded a sales of Rs.40 cr and a net profit of Rs.4 Cr in the first quarter ended in  September ( Company's year ends in June )  ,this  figure is even after deducting a  forex loss of Rs.4.6 cr.

   

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Company’s balance sheet is virtually debt free and now it expanding production capacity utilising funds at cheap cost .Company expecting a contribution of Rs.300-400 Cr from this facility when it completely operational.Even if the  company scheduled to start  operations from final phase (phase 3) of this facility by September 2014 ,it may delay by 6 month or so.Even then company can report respectable numbers with productions from phase 1 itself.

In pharma sector ,different companies are following different business models.Some of them are unique in their products developed by own R&D like Biocon..etc ,some of them are unique in production capacity which aims mass production to reduce per unit cost ,like Granules India .In the case of Caplin Point, uniqueness is in its well knitted marketing network across many under penetrated Latin American and African countries.Unlike many other pharma countries which are exporting products to bulk distributors there ,Caplin point established their own offices in these countries and selling of medicines  controlled by their own offices located there.This strategy helping the company to earn higher margins and also to get a clear idea about the changing demand scenarios in that countries.

In nut shell let us summarise the reasoning for a positive view on this company  as below

1)      Company is virtually  debt free

2)      Promoters accepting their faults happened  in the  past and ready to change

3)      Consistently growing in their second innings,turned to a profit of Rs.14 Cr from a loss of Rs.2 Cr in last 5 years.

4)      No hesitation to reward share holders ,increased dividend from 10 % to 25 % in last four years.

5)      Well established marketing network in Latin American and African countries with own offices and infrastructure in these countries.

6)      Supplying ‘products in need’ ,and getting advance payment for supply ,really an interesting business model.

7)      Massive capacity expansion without debt burden ( As per management estimates full capacity utilisation will generate an income up to Rs.400 Cr)

8)      First phase of new plant is ready and   trail run will start  start by this  month end  itself.

     

9)      Already established marketing arrangements for part of the products from the new plant.

10)   Higher promoter holding ,more than 57 %  + 10.38 % held by relatives of promoters under non promoter category

11)   A well accepted supplier of the generic version of Sildenafil citrate to many overseas countries and online drug stores .

If the company can secure approvals from USFDA and other overseas authorities in time,this stock will turn out as a dark horse and a re-rating like the one happened in Ajanta Pharma is a possibility .Even if there is any delay in approvals, it can still improve its performance with the export of products to other countries through existing channels though the margin may be bit lower .Even in that case one can expect reasonable appreciation from the current level. Commissioning  of its  new plant will be a landmark in the history of company which will re-write the magnitude of the operations of Caplin Point .One can buy it  at CMP Rs.86

Stock listed only in BSE with  code 524742

Link to Company website HERE 

Details of new plant HERE

Link to Annual Report HERE

Disc : It is safe to assume that I have vested interest  in CPL