Caplin Point an attractive bet

There are a number of similarities between Caplin and Ajanta

MUDAR PATHERYA  July 11, 2016 Last Updated at 00:24 IST

A number of analysts seek the next ‘Ajanta Pharma’, implying

a company with high margins, cash-richness and
stratospheric market cap growth that makes owners wealthy
(forget rich). I am going to stick my neck out and say ‘Caplin
Point Laboratories’.

There are a number of similarities between Caplin and

Ajanta — both companies are into formulations, both work
with high margins, both are zero-debt (net), both are asset-
Mudar Patherya light and both are principally marketing companies (with
back-ended manufacture/outsourcing).

A number of things make Caplin Point compelling. Caplin outsources the manufacture of a
significant part of its product mix (antibiotics, NSAIDS, ophthalmic, pain management and
anti-ulcers), emphasising asset-lightness.

Company has selected to focus on only nine countries in Latin America (not the easiest of
continents in which to run a B2C operation), rather than be in a tearing hurry to stretch
itself across dozens. The company works with advances from primary customers (dealers),
resulting in a negative working capital cycle.

The company is the principal importer of all the medicines into Latin and central America
(in addition to export), widening its value chain. What I like is that a part of the promoter
family work out of Latin America, managing the trade channels – not in cushy Chennai.

The company has effectively no debt and Rs 65 crore on its books (March 31, 2016); more
remarkably, it invested in future-facing manufacturing facilities for injectables directed at
the regulated markets (already approved by EUGMP and ANVISA and could be subject to US
Food and Drug Administration (FDA) review a few months from now) completely out of
accruals.

Best of all, there is a streak of responsible craziness; when the company entered Latin
America, the promoter engaged individuals from his Tamil Nadu village, trained them in
Spanish and English and deputed them in Latin America. The result is a captive pool of
multi-lingual executives who serve as an effective bridge between local (marketing) and
Indian (back office) realities.

The impact is in the numbers. Caplin Point has reported profitable growth for eight years of
the last 10; the company has reported profit growth across 11 successive quarters; net profit
margin was 19 per cent in 2015-16, interest cover in the high hundreds and inventory turns
accelerated even as revenues increased. There are three things that excite me about Caplin
Point.
Caplin expects to widen its product basket with soft gels, penems, dermo-cosmetics and
suppositories, helping it penetrate deeper.

It expects to integrate forward into retail in Latin America, generating the biggest mark-up
and accounting for nearly eight per cent of store merchandise from day one.

And lastly, the company intends to enter US, its biggest game changer. The two related
triggers could be USFDA clearance (whenever that happens) and the filing of ANDAs for that
market. This will not only create attractive revenue potential but also a plant monetisation
possibility.

What makes this story absolutely compelling is that despite all that it has achieved in terms
of margins and business model robustness, Caplin Point is still small cap by revenues –
around Rs 300 crore annualised in 2015-16.

If only the stock could get cheaper than Rs 1,500 crore…

The author is a stock market writer, tracking corporate earnings and investor psychology to
gauge where markets are not headed