I was going through my old notes on Suven Pharma and came across the following lines:
“Overall, I am not 100% comfortable with this at the moment” is written in red. This is how analysis of FY21 Annual Report ended, so these comments must be dated around July – August 2021. I couldn’t pinpoint what exactly caused me discomfort – may be a Rs.600 crore capex of which only Rs.150 crore would go for increasing productive capacity, may be the alternating of a good quarter with a bad one almost as a set pattern, may be limited level of disclosures in the AR – may be all of this or something else – but something seemed missing. I did nothing about this – held on to my stock and continued to monitor.
In the Annual Report of FY22, I noticed details about Top Customers were missing. I wrote two emails to the company asking for this information but received no reply. Later in the concall post Q1 FY23 results, someone asked about this but the management did not reply. Rollback of any disclosure is a clear negative, if not a red flag.
The Q1 FY23 results themselves had been disappointing, and the management blamed the same on Covid inflated revenues in the previous period. Below conversation is from the Q1 FY23 concall:
Last year, Rs.120 crore were covid revenues, mainly in the 3rd and the 4th quarter. But in the concall after the 3rd and the 4th quarter last year, management clearly denied any one off and stated that the growth was all organic. Below conversation is from the Q4 FY22 concall:
Transcript of the Q3 FY22 concall is not available but here are some quotes from the audio:
“things are moving well”
“run rate will be closer to the same thing as of quarter three”
“for the next 6 months things look good”
“things are better now”
“On the CRAMS side, the traction is much better for the next two quarters”
And after this, the revenues fell sequentially from Rs.392 crores to Rs.339 crores in the next two quarters. Quite surprising since the management always maintained they have visibility for 2 quarters.
In the interim, Suven had bought Casper, a deal which was looked upon unfavorably by the markets. But I was okay with the same (see comments here). The market saw a dilution of margins in the Casper deal, I thought it reduced the business risk.
By this time, the stock had also begun to underperform severely, indicating the market knew something which I didn’t, adding to my discomfort. I decided to exit the stock and did so in a phased manner. In any case, I had entered the stock soon after the demerger and a 3X return in less than 3 years was not a bad bargain.
In the TV interview after the current deal was announced, Mr. Jasti said the primary reason for selling out was a lack of successor (click here). However, there was no mention of this in the analyst call post the deal announcement, where the management repeated the ‘platform + value creation + global reach of Advent etc.’ ad nauseum as justification for the deal. But it is inconceivable that a promoter will completely sell out a growing company with top class margins for these benefits. It is like a husband telling his beautiful wife to elope with someone else so that she will be happier !
The lack of succession from within the family sounds a more credible reason for Mr. Jasti’s sell out. But still it is difficult to understand why he could not appoint a professional CEO and move to the background, like so many other Indian promoters have done – if Suven was as good a business as the market has generally believed it to be. The lack of successor point also brings to question the Rs.3 crore plus per annum (in dollars) paid out to Mr. Jasti’s daughter from the company’s books. One would have thought she was being groomed to take over the business. Her husband – also a healthcare professional – is also on Suven’s board. But evidently, the couple is either unwilling or incompetent to carry forward the business.
On the whole, Mr. Jasti’s sell out of Suven justifies the discomfort I carried with the business. With Advent merging Cohance with it, which itself is a company formed last month by merging three other companies, a deeper understanding of Suven Pharma as a standalone business will most probably never happen.
(Disc.: No positions)
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