Hi Alekh,

At a high level, ultimately everybody is trying to come at a decision whether to buy a particular stock or not. But as I said in my post above that it is a mixture of all the factors and not just EV/Tonne or EV/EBITDA in isolation and hence wouldn't say what is a good EV/EBITDA or EV/Tonne.

For e.g. EV/Tonne of $25 or $30/tonne is very cheap but if there is huge oversupply due to massive existing capacities and there is no visibility of demand improving for another 2 odd years or more then buying this cheap also may not help as opportunity cost lost would be a lot, etc,. (I think you get the point )

That said, I personally feel that Deccan and NCL are still not expensive and decently priced (don't want to use enticing adjectives ), as at a high level, even if I take today's mkt cap of approx 500 Crs. for Deccan and their FY15 debt of 159 Crs and Cash balance of 26 Crs. then their EV works out to be (500+159-26) = 633 Crs.

Deccan's capacity is 2.2 m tonnes. Therefore EV/Tonne will be (633 Crs/2.2m tonnes) = Rs 2877. Therefore in $ terms at exchange rate of Rs. 66 per $ this would work out to be $ 44.

Which ($ 44) I don't think is expensive for a company:

1. Which has demand visibility in the region ( demand due to constructions due to Andhra/Telangana state formations, govt. spending on infra will start showing at ground level as well; Not much real estate demand but if that picks up then wud be more better).

2. Doesn't have major capacity additions coming up in the region.

3. Has seen cement prices being stable or going up in the region (http://www.deccanchronicle.com/151123/nation-current-affairs/article/cement-price-rs-70-bag). Note: I personally take such news paper articles with pinch of salt and better way is to verify the cement prices (or trends) on the ground as it is not much difficult to do so.

4. Has seen margins expanding.

5. Has been consistently reducing debt.

But if one says that in the light of all positive factors $ 44 is cheap then what is it cheap in comparison to? Obviously it is cheap in comparison to replacement cost per tonne which maybe around $ 120 -130/ tonne. But personally for small cement players to be on the safe side I would compare it with say $ 80-90 per tonne.

At a personal level there are many things which one considers to decide when to sell etc, which is difficult to put here. Say for example I am saying and feel that it is not expensive and decently priced but as a DISCLOSURE - I sold 1/3rd of my holdings in NCL today at 160+, the reason was not that I feel it is expensive but sold it 'coz wanted to top slice my portfolio, as I had bought NCL at lower levels and it had reached 15% of my portfolio and I wouldn't be comfortable with a small cement company becoming 15% of my portfolio.
Also at the same time I would like to remain in Cement as a sector right now (if I continue to feel favourable and improving demand scenario), but at a certain point I will move from NCL to a bigger cement player (say India cements with 15+ m tonnes of capacity). Buying NCL (or a view on Deccan etc), was a decision I took 'coz I felt that undervaluation was a lot in these companies with certain factors improving (as stated above. Please note that I might have missed stating few other factors that I might have considered for e.g. technically also I felt stocks had bottomed out and most of the selling had been absorbed or EBITDA/tonne & EV/EBITDA or receivables cycle & working capital cycle, etc,. hence don't consider the factors I stated as the sole basis for my decision making as I might have missed more than few).

Hence, in short, one needs to take his own call depending upon individual's thought process.

Also please note that I think there is a risk of some kind of government action trying to reign in cement prices. Please be cautious of this factor apart from associated risk factors as these are cement companies with very small capacities.

Disclaimer - I am a novice & an amateur investor, hence please discount/ignore my views. Above are just my views and not a buy/sell recommendation. The calculations/numbers etc, are back of the envelope calculations and hence can be way off the mark as compared to actuals; therefore please do your own due diligence.

As per management commentary in AR 2014-15, the Phase-Ib trials for SUVN 502 is completed and commenced preparations for the Phase-IIa (POC) trial. The management hope to initiate patient trials during the second half of the current year and are hopeful of monetising this molecule post successful completion of the study in fiscal 2017.

What I am trying to understand is the reason for difference in margins. The difference is huge. 8kmiles have 50% more margins than Kellton and even Cambridge has more margins than Kellton. I think you are right that everybody is going for IOT and I believe that we should have a basket of 3-4 companies if we want to play ISMAC. Big gun like Oracle is also entering into cloud service (one of my friend based in US told me).
I did not entered into Cambridge because it was ultramicrocap and now continuous upper and lower circuits scare me. I was invested in 8k miles soft from 600 levels and booked out completely at 1750 because I think the stock price completely discounts next 1.5 year performance. I will be willing to add if there is any fall as I like its clients and the margins 8k is making from those clients.

Neuland Laboratories Ltd a 30 year old pharma company is a predominantly API manufacturer (85% ) with a some presence in CRAMS (15%) derives 88% of its revenues from US, Europe & Japan.

Neuland claims to have to transformed itself from manufacturing commodity APIs towards having capability to develop complex molecules in niche segments – Opthalmic, Schizophrenia, anti-asthma, anti-fungal. -> This is verifiable easily. We will see in the subsequent sections.

Their top five products contribute to ~4% of the topline while top 5 customers contribute ~40% of the topline.

Active Pharma Ingredient (85%)
In API manufacturing, the competitiveness of a manufacturing company is determined by one of the following ways:
1. Build massive scale, cost advantage in commoditized APIs – A new competitor won’t be able match you (or)
2. Identify niche APIs which has complex chemistry so that competitors will find it difficult to imitate. -> How to verify this? Look at the molecule, find out the # of DMF filers for that molecule(may give a hint).

Neuland claims(or HAS IT?) to have graduated from #1 (above) towards building capabilities in developing niche complex APIs in segments like Opthalmics, Anti-asthma & Bronchodilator segments.

Here is the current list of Products from Neuland’s with the # of DMF filers:

Pasted image559x941 22.6 KB

To update - I am working on identifying the # of competitors for these molecules. Will update after I complete. All these molecules have more than 1 competitor.

Some observations:

1. In about 15 molecules, Neuland is either the only player/ has only one another competitor.
2. In antibiotics:
   a. Higher the generation the molecule is present in, higher the margin for the company. The company’s presence in 3rd and 4th Gen molecules indicates R&D capability of the company.(check the table below)
   b. In Antibiotics, Ciproflaxacin is a commoditized API. Neuland is moving away from this molecule. A few years back, 65% of their revenues were from this molecule vs 15% of their revenues from Ciproflaxacin now ->Aarti Drugs is the global leader here.

3.For commoditized APIs, Neuland’s claims to play the volume game. – this contradicts in case of Ciproflaxacin – Aarti has taken away significant market share in the last 3 years from Neuland.

4.Visibility of earnings : About 10-11 APIs for which DMFs have been filed, are expected to go off-patent in the next 3 years. Timeline column indicates the expiry date for the patented version of the molecule in US market.

CRAMS:
Contract Manufacturing involves manufacturing APIs based on custom specifications of the customer.
1. Their Contract Manufacturing segment has grown at a CAGR of ~70% in the last three years.
2. They have non-exclusive agreement to manufacture custom products with leading Europe & US customers.
3. Recently a large US customer has filed an NDA for the US market which is said to throw up an interesting opportunity – have to verify this claim

Pact with Mitsubishi Chemicals:
Neuland has entered into a pact with API Corporation (subsidiary of Mitsubishi chemicals ) to manufacture custom products for APIC.
APIC has invested 15 crores in their existing Pashamylaram facility to create the manufacturing infrastructure.
Neuland gets reimbursement of the operating expenses incurred at this facility – Don’t understand the revenue model here. Need to research more.

Neuland has developed some expertise on Peptide based products which are considered very complex in chemistry field.

Questions/Summary:
The company definitely looks decent especially:
a. it looks like it is trading at 12 PE based on FY17 earnings
b. # of molecules where they have limited competition.
c. Added Revenue visibility from APIC contract with Mitsubishi

But the following questions are key before one considers investment here. The management seems very transparent as they have disclosed most of what is required in every concall.

• Imitability: The above pipeline of molecules going off-patent in the next few years looks interesting. But how difficult is it for a new API manufacturer to develop these molecules?
• Debt: API manufacturing companies go down when they take the path of debt – Wanbury (global leader in Metformin), Parabolic(Cephalosporin), Indswift labs all failed because of financial distress and not because of lack of demand for their products.
  As of now their D/E ratio at ~1 looks decent for an API manufacturing company especially considering the future growth possibilities. What is their approach towards debt?
• What is their revenue model with API Corporation?

I wanted to look at some pharma names outside our comfort zone - i.e. Torrent, Shilpa, Ajanta etc. That's when I zeroed in on Neuland after researching other API manufacturers like Aarti, SMS, etc.

I am still researching on this idea. Will update this thread as an when I find out more.

Thanks,
Ravi S
Disclosure: I have no positions in Neuland as of today. I may initiate a position in the next few days in this company based on further analysis.