Warren Buffett, the World’s greatest investor offered valuable advice that “A great investment opportunity occurs when a marvelous business encounters a one-time huge, but solvable problem“.
Sanjoy Bhattacharyya, the doyen amongst value investors, and Saurabh Mukherjea, the whiz-kid from Ambit Capital, are staunch disciples of Warren Buffett.
When IPCA Labs, the highly regarded mid-cap Pharma stock, got into trouble with the US FDA over alleged violations, the duo of Sanjoy and Saurabh saw it as a golden opportunity to put Warren Buffett’s theory to test.
Sanjoy Bhattacharyya was very articulate. He argued vehemently that the crises in which IPCA had found itself was a “great chance” to buy a “wonderfully run company, with a tremendous track record and high quality management”.
Saurabh Mukherjea was also gung-ho about the stock. In his usual meticulous style, he systematically listed out three strong reasons to buy IPCA.
Sadly, today, nearly 22 months after the fateful day when IPCA announced the grim news of the FDA violations, IPCA has not been able to get its act in order.
The latest body blow is that the Global Fund, Geneva, has refused to source Artemisinin-based Combination Therapy (ACT), an anti-malarial drug, from IPCA. This decision was taken in view of the FDA warning letters issued to the company.
Analysts have opined that this step by the Global Fund has serious ramifications for IPCA because the anti-malarial drug is one of its blockbuster offerings.
Daljeet Kohli has wasted no time to condemn IPCA Labs to a “sell”. In a tersely worded note Daljeet said:
“The regulatory hurdle continue to worsen business opportunity for IPCA, now, with non-allocation of ACTs. In addition to business in US, which is stuck due to import alert followed by warning letter at its three key facility, global fund has also stopped supplies from IPCA till clearance of regulatory issue. Institutional anti‐malaria business to global fund formed ~8.5% of total sales in FY15. It has already reduced to the tune of 1bn and Rs1.3bn in 9MFY16 and FY16E. There was hope of revival of Institutional business over near term. However communication by global fund to IPCA indicates business to revive only post clearance of USFDA issue by IPCA …. Regulatory hurdle has now adversely impacted business of Institutional anti‐malaria segment, in addition to business in US market …. We downgrade to SELL from HOLD based on valuation.”
Edelweiss has expressed the same opinion and condemned IPCA to a sell.
This reminds me of another of Warren Buffett’s classic quotes:
“Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
Meanwhile, we have to compliment Daljeet because Shilpa Medicare, a stock that he has backed from March 2014, spurted a magnificent 18% today over news that the Japanese FDA has given it the all-clear. This means that it is only a question of time that the USA FDA also gives it the much coveted green signal.
It is worth noting that Shilpa Medicare is also certified as a “potential 100-bagger” stock by Motilal Oswal in its highly regarded Wealth Creation Report. The stock is already a multi-bagger since Daljeet’s first recommendation and we should not be surprised to see it effortlessly scale new heights!