Mudar Patherya’s Prediction That Small-Cap Is “Next Ajanta Pharma” Is Coming True

Mudar Patherya, the veteran stock picker, who is known for his deep knowledge of micro and small-cap stocks, was confidence personified when he boldly declared that Caplin Point Labs is destined to “the next Ajanta Pharma”.

Ajanta Pharma – the unmatched multibagger

The distinguished audience was awestruck by the prediction because Ajanta Pharma has an unmatched track record for wealth creation. The Company started life as a run-of-the-mill manufacturer and supplier of formulations to Government dispensaries.

Somewhere down the line, a magical transformation took place which altered the fortunes of the Company. Today, the stock has the credentials of a certified mega multibagger because over the past ten years (03.10.2006), the stock has given an eye-popping return of 19,718%. Even in the last five years (03.10.2011), the stock is up a magnificent 4,847%.

This means that a sum of Rs. 1 lakh invested in Ajanta Pharma is Rs. 1.97 crore over ten years and Rs. 48 lakh over five years.

Caplin Point – Also a heavy-duty multibagger

The interesting aspect is that Caplin Point is a heavy-duty multibagger in its own right. Over the period of ten years, Caplin Point has given a return of 10,059%. Over the past five years, the return is 7,059%.

However, the stock is still a small-cap with a market capitalisation of only 2,655 crore. This implies that it has a long road to traverse before it becomes a mid-cap and thereafter a large-cap.

Mudar Patherya’s discerning eye detects similarities between Ajanta Pharma and Caplin Point

When the distinguished audience demanded to know the basis on which Mudar had made the sensational prediction, the veteran stock picker revealed thus:

(i) 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);

(ii) 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.

(iii) Caplin 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;

(iv) Caplin Point is the principal importer of all the medicines into Latin and central America (in addition to export), widening its value chain;

(v) 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.

(vi) 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;

(vii) 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.

Absolutely compelling investment proposition

Having said this, Mudar then went on to identify the three things that excited him about Caplin Point.

(i) Caplin expects to widen its product basket with soft gels, penems, dermo-cosmetics and suppositories, helping it penetrate deeper;

(ii) 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;

(iii) 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”, Mudar said in a tone of great excitement.

High RoE, Debt-free, top-quality management

Caplin Point ticks all the boxes that experts have in their checklist for finding multibagger stocks.

(Source: Valueresearchonline)

The Company is debt-free. The efficiency and capability of the management is demonstrated by the sky-high margins and ratios of RoNW and RoI.

[*C] Consolidated     [*S] Standalone

(Source: Business Standard)

Low Liquidity

According to experts, an essential attribute of a multibagger stock is that the floating stock must be low because that creates “supply scarcity” and results in “mis-pricing” of the stock.

This requirement is satisfied by Caplin Point because the promoters hold 69.09% of the capital. Of the balance 30.91%, Mathews India Fund holds 3.99%. Upto 17.40% of the equity is widely dispersed amongst individuals holding capital of less than Rs. 2 lakhs. The result is that the stock enjoys low liquidity.

USFDA approval is around the corner

This important news was revealed by Ekta Batra of CNBC TV18.

Caplin point usfda inspection in Oct is positive. if thy get approval will foray into US. currently 90% sales to lat am + high disclosure

— Ekta Batra (@ekta_batra) September 12, 2016

She rightly pointed out that news is positive as it opens up an entirely new market for the Company.

It is obvious that getting the FDA approval will be a cakewalk for Caplin Point given the efficiency of its management. When the formal approval comes, the stock will take off in a vertical trajectory.

Truly a “hidden gem”

The astonishing part is that despite its stellar credentials, robust ratios and multibagger gains, the stock is little-known amongst investors and analysts. Probably, recognition will come in when the USFDA gives official clearance to the Company. One can expect analysts and investors to wake up to the potential of the Company at that stage.

Clean chit already given by USFDA?

Today, Caplin Point spurted a magnificent 20% and tripped the upper circuit. This led the punters at MMB to speculate that the USFDA may have already given its approval or that the same is around the corner.

Conclusion

We have to compliment Mudar Patherya for his efforts in digging up hidden gems and handing them over on a platter to us. His thesis that Caplin Point is the next Ajanta Pharma is very convincing and looks achievable. The lucky investors in the stock can look forward to more mega gains in the foreseeable future!