Caplin Point an attractive bet

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-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