Basant Maheshwari, in his bestseller “The Thoughtful Investor”, has expressed grave reservations about investing in Pharma stocks. He candidly admitted that he did not understand the FDA-dependent business model and thought it was a risky sector.
In my review of the book, I expressed surprise at Basant’s views. How can a person of such razor-sharp intellect be so wary about such a wealth-creating sector that is so easy for everyone else to understand, I wondered aloud.
Today, I am happy to report that Basant has overcome his phobia for pharma stocks by recommending Granules India as being worthy of investment.
In his interview to CNBC TV18, Basant candidly admitted that earlier he had “cobwebs in his mind” about the FDA related risks in the pharma sector. Instead, he now says that he is now extremely bullish about the sector.
Interestingly, Basant has done a total somersault about his views towards the Pharma sector. While earlier, he was wary of the sector, he now exclaimed that “the best part of the Pharma sector is that no matter what you do, you don’t get killed. How many times have Wockhardt and Aurobindo bungled it up? Still they are up. Pharma gives you the chance to rise again and again”.
With reference to the prospects for the industry, Basant explained that when a drug goes off-patent, its’ selling price crashes and it is impossible for the MNCs to continue to make the drug in a developed country owing to the high cost of production. Instead, the business has necessarily to be routed/ out-sourced to low-cost countries like India.
“It is a $150 billion opportunity” Basant emphasized.
Basant further explained that within the Pharma space, there are companies like Natco Pharma and Suven Life Sciences which are like “magic show” companies. He pointed out that these companies enjoy a temporary period of exclusivity for new drugs which enables them to command a premium from the market. However, once the period of exclusivity ends, their future is uncertain, he said.
On the other hand, there are bulk drug manufacturers which can be expected to churn out a consistent return year after year.
With specific reference to Granules, Basant pointed out that it is slowly changing its business model from dependence on low-margin bulk drug APIs like Paracetemol to high-margin formulations. He pointed that the formulations presently constitute 40% of the total sales and that this is expected to increase to 60% in the next couple of years.
Basant also pointed out that the takeover by Granules of Auctus and the CRAMS joint venture with Omnichem meant that there would be a steady upward growth in revenue and profitability.
Basant also opined that the B2B nature of Granules’ business makes it a little less vulnerable to FDA risks as compared to a B2C business. Basant’s logic is that as Granules supplies bulk drugs to other Pharma companies like Mylan, they keep a hawk eye on Granules’ facilities and ensure that there is no complacency in regulatory compliances.
Granules’ consistent track record of 26% CAGR growth over the past several years also appealed to Basant. “You can really bet that the growth will continue” he said. Granules’ low P/E of about 9 times FY17 earnings also met with Basant’s approval.
“There are interesting things happening in Granules and it will do well” Basant concluded with his customary air of confidence.
Basant now joins the long list of luminaries who are bullish about Granules. In my piece “What Is Granules India & How Does It Qualify As A Potential 100-Bagger Stock?” I have referred to the fact that not only is Granules acclaimed as a potential 100-bagger by the Motilal Oswal 19th Wealth Creation Study but also every other brokerage is bullish about the stock. Also, when the stock plunged in the wake of so-so Q4FY15 results, I asked the rhetorical question “Why Is Granules India, The Potential “100-Bagger Stock” In A Free Fall? Is This The Opportunity We Are Waiting For?” So, if you don’t have Granules in your portfolio, you need to ponder over it carefully.