Caplin Point Laboratories

ABOUT THE COMPANY

Caplin Point Laboratories Limited is a rare mid-sized company in India’s pharmaceutical sector to be engaged in the R&D and manufacture of finished formulations, APIs, clinical research, front-end generic presence in Latin America, brand marketing in Francophone Africa and a USFDA/EU-GMP approved injectable facility. Caplin Point has 4000 + products registrations across the globe with 650 + pharmaceutical formulations & over 36 therapeutic sections.

It has grown consistently over the last decade with a unique business model which provides them with cost advantage, research and innovation, cash generation, strong distribution networks, channel partnerships and accretive growth opportunities. They started out in the deeply underserved Latin American countries where other Indian competitors did not see potential revenue sources.

BUSINESS MODEL

• Robust Infrastructure with 4 manufacturing facilities and 3 R&D facilities. They acquired an API plant recently for backward integration. The complex products are manufactured in India.
• The company has long term contract manufacturers in China for their generic products. This ensures the lowest possible manufacturing prices for their products. Chinese trade agreements with LatAm countries helps Caplin export products without attracting higher duties. China amounts for 35% of the company’s exports.
• Caplin Point has built extensive distribution networks from the scratch which reduces their logistical cost and thus adding to their profit margins.
• Introduction of pharmacy automation and portals to simplify the ordering process for pharmacists in Latin American countries and create stickiness.
• Caplin Steriles is their subsidiary which caters to the USA and other regulated markets for injectables, ophthalmic and other related products.

REVENUE BREAKUP

• By Geography: 83% LATAM, 14% USA, 3% Africa – They have scaled up the USA business in the last 3-4 years to cater to 14% of their business
• By Business Segment (except Regulated Markets): 75% Generics, 25% Branded Generics – The share of branded generics has gone up from 5% to 25% in the last 10 years which adds to higher margins
• By Channel (except regulated Markets): 65% Distributors, 20% Direct Sales, 15% Tender Business

GROWTH OPPORTUNITIES

• Additional business of Rs.80-90 crores from LatAm markets through their Softgel Product line and Rs.30 to 40 crores from Brand Marketing
• Introduction of Generic business in West Africa with potential revenue of Rs.10 cr
• Business of Rs.20-25cr through new initiatives in CIS region and Southeast Asia
• Strong order book to the tune of ~Rs.230-240 crores and additional income of Rs.90 to 100 cr from Caplin Steriles
• Received 2 tender awards from LatAm countries for speciality and oncology products to be delivered in Q1 and Q2 of FY24
• Potential entry into new regulated and unregulated markets like Canada, Australia, Brazil, Chile, Mexico
• Strong order book for Caplin Steriles to the tune of ~Rs.230-240 crores

CAPEX PIPELINE

Capex pipeline of Rs.500-550 crores to expand existing capacities, widen portfolio and backward integrate the products has been undertaken through internal accruals.

• Capacity expansion at Caplin Steriles: Phase 2 of the facility nearing completion, commercial batches targeted by Q3FY24 from this unit. Post completion, company will be able to leverage large batches with faster filling speed for Injectable Vials. Also, a PreFilled Syringe line is being added, a new delivery system previously not available at Caplin Steriles. Phase 3, a standalone plant close to the current site is expected to be completed within Q4FY24, which will have high Lyophilization capacity, and plans to add complex dosage forms such as Inhalations.
• Oncology: Oral Solid Dosages nearing completion. Injectable phase to be completed within 9 months.
• API Plant: General category API site refurbishment work ongoing, completion expected within 4 months. Oncology API site construction starting in Chennai plant to be completed by Q3FY24.
• Capacity expansion at ROW facility: Softgel capacity expansion completed , with 2x the current capacity established for existing markets. Injectable expansion ongoing – lyophilization capacities to be expanded by 4x.
• Oral Solid Dosage facility for Global Markets: Facility expected to be completed within 12 months, will increase capacity by 3X to cater to additional demand.

ABOUT THE MANAGEMENT

The company was founded by first generation entrepreneur Mr. CC Parthipaan in 1990. The company was on a downfall as it was caught in a storm of quality issues and rejected consignments. However, the grit of Mr. Parthipaan made it a great turnaround story in the Indian market. He chose to serve the underpenetrated countries by personally staying there, understanding the markets and forging deals .The management has converted the neglected markets into rich sources of cash which was generated at high return margins. The unique business model requires implementation which is ensured by the sons of the founder. One of them lives in China, speaks fluent Chinese, and overlooks the manufacturing in China and the other one lives in Guatemala, a risky Latin American country where he overlooks the company’s business operations. They have many executives in the countries where they conduct business, who have all come from small villages in Tamil Nadu. They were all trained in Spanish before being sent there. It is remarkable to see the management not forget their roots, their mission, and their values while at the same times running a fast growing and a profitable business. Promoter holding stands at 70.66% as of Q1FY24.

INVESTMENT RATIONALE AND FINANCIAL ANALYSIS

• Exponential Topline and Bottomline Growth: Caplin Point has managed to grow revenues and profits at 30% CAGR and 47% CAGR respectively over the past 10 years. Management guidance for the next 5 years stands at a CAGR of ~30% for revenues and profits. The business had 10 consecutive years of profitable growth and managed to outperform most of the players in the Pharma sector in this period.
• Cash rich business with strategic cash allocation: Caplin Point stood with Cash and Cash Equivalents of Rs.772 crores on 31st March,2023 from a meagre position of Rs.17 crores 10 years ago. The free-flowing cash of the business and the judicious use of cash at disposal has made the company grow consistently. They have spent more than Rs.700 crores on CAPEX in this period, entirely from company reserves.
• Debt free: The company has virtually been debt free since 5+ years and has only resorted to short term borrowings for operational activities. This throws light on the strategic decision making of the management who have managed to compound the business without external funds, i.e., diluting equity or raising debt.
• Healthy R&D and ANDA Pipeline: Caplin Point is one of the few pharma companies with an extensive focus on R&D. On an average they have spent about 6-7% of their revenues on R&D. They also have setup their own CRO wing for internal and commercial use. Their successful innovation has converted into a healthy pipeline of 55+ ANDAs for the regulated market. 20 ANDAs are already approved while 29 are filed.
• High Return: Their average ROCE for the last 10 years has been 47% while it has been 32% in the last 5 years on a higher base. Their FY23 ROCE stood at 27% and moving forward, one can expect ROCE in the range of 25-30%. Their ability to regenerate profits out of the available capital has been remarkable.
• Unique and efficient business model: Caplin Point has used a different business model from the rest of the industry which enables them to manufacture and export at extremely low rates and their own FMCG like distribution channel saves them from higher logistical costs. They have gained significant market dominance in countries like Guatemala, Nicaragua, El Salvador, and Ecuador.
• Huge scope of business with margin expansion: The company’s next steps are to move into regulated markets while expanding their business of Caplin Steriles which caters to the US market currently. They have managed to scale it up to 10% of their revenues and are already PAT breakeven after accounting for the registration, license, R&D fees. With the business scaling up from these levels, the injectables business can expand their EBITDA margins to 35-38% from the current 32%. The oncology business setup is soon to be operational which will add to the margins as well. Once their ANDAs in pipeline are approved, their addressable market size will be $5B+, 8x potential from current levels.

VALUATION

The company is currently trading at a PE of 15 which is cheaper than the median PE of 25 times for the pharmaceutical industry. As per FY24 forward EPS of Rs.65, it is trading at a PE of 12. Therefore, the market has undervalued the stock and it offers a significant upside from current price levels. It is a potential candidate for a re-rating. Measuring at the current PE basis FY26 forward EPS of Rs.112, we get a price target of Rs.1680. Given that the company is rerated on a conservative basis at a PE of 20 against 25x of the industry, we get a price target of Rs.2240 for FY26, i.e., 3x from the current price levels.

WHY YOU SHOULD NOT INVEST IN THE STOCK

• Increasing Working Capital Cycle: Caplin moved from a negative working cycle in FY2018 to a cycle of 198 days in FY23. The company has had a substantial increase in their receivables and inventory as they are expanding into newer geographies and taking up Government contracts. Any mismanagement of inventories or increasing bad debts can hinder growth and the smooth operations of the business.
• Highly competitive USA Market: The management has made an aggressive bet on the USA markets, a market which is catered to buy the most pharma players in the world, including numerous Indian companies. Their injectables business has tough competition from Indian companies like Alembic Pharma, Dr.Reddy’s, Gland Pharma, Glenmark, Cadila and many more. The pharma sector in the USA has faced significant price erosion in the last year and there are challenging times ahead for the companies catering to the market. The management’s bet is staking the future of the company in a lucrative but difficult market.
• Reliance on China: Caplin Point heavily relies on their Chinese business and manufacturers to cater to their generic segment. In these complicated geopolitical times, when countries are following the China+1 policy, Caplin Point is exporting 35% of it’s products from China. They are also reliant on Chinese trade agreements with the Central American countries which can be cancelled due to some adverse event.
• Increased regulation in countries of business operations: Caplin Point built its business model in a way that they had to cater to the unregulated and semi regulated countries in the world. Any activity of increased regulation in any of these countries can affect their business for a short time, until the approvals can be met.
• Claims/Allegations against the company: Being a part of the pharmaceutical industry, Caplin Point always has the risk of production going wrong, batch qualities being affected, customers developing adverse side effects and their products being banned.
• Overambitious management guidance: The management has given a guidance of FY28 bottom line being the same as FY22 top line. This converts to a growth at CAGR of ~27%. However, the first two years, the company grew at CAGR of 17%, which means that they have to grow at 32% CAGR while maintaining profit margins, in order to reach the target. Though achievable as the management has backed their guidance with results in the past, this ambitious target can go wrong, which could result in stock price correction.

Disc: Personally invested. My first post on this forum, feedback would be appreciated