Cupid’s sales growth and margins peaked in March 2017. Thereafter sales have shown a jump in FY20 but stagnated since then. Last 10-year sales CAGR is 19 % but last 3-year CAGR is almost zero. Management has indicated no growth in revenue and profits for FY24 as well. Clearly, business is very lumpy by nature. For example, in FY21, Brazil business was more than Rs.50 crore but in FY22, it was Nil. In FY23, South Africa contributed Rs.43 crore but in FY22, it was nil or very small. Such lumpiness is not good for stock valuation.
Margins have declined from 41 % in FY17 to 26 % now. Q1 FY24 was worse, with margins at less than 10 %, part of it due to a penalty for quality issues. But even excluding the penalty, margins were sub-20% which are lower of the range.
Over the years, capex has been minimal, gross block is Rs.73 crores. Most likely, an old, depreciated plant produces products that just about meet minimum quality standards to help bid for tenders. The recent penalty on account of quality issues could be a reflection of this.
ROE / ROCE is good in the range of 20 % plus aided by low denominator. Dividend payouts have been okay at around 30-40 %, which indicates management has been able to sweat the existing assets well but has refrained from deploying more money into the business.
Going ahead, the IVD business can take off meaningfully only from FY25 if at all, not before. In this, the management expects Rs.50 to Rs.100 crores business per year from FY26, and though the margins in this are said to be good, it will also consume Rs.30 to Rs.40 crore working capital per year. The U.S. business too will not happen before FY25, after which the company expects about Rs.8 crores of revenue in the first year. And, though the long run potential here is much larger, it will also be a tougher market. The current management, with their reluctance to make investments in branding, distribution, or technology, may not be best placed to realize its full potential.
This brings us to the point that only an ambitious, aggressive management can realize the potential of the business. But at the current share price, management’s stake sale efforts are unlikely to find any takers.
Current market cap is Rs.500 crores but free cash is around Rs.100 crores, so business is valued at around Rs.400 crore. It generates around Rs.20 crore of free cash flows per year, so excluding cash in hand, current valuation is about 20X the CFO, or a 5 % yield. Will someone pay Rs.400 crores for a business which generates Rs.20 crore of FCF and has less than Rs.100 crore of assets? Generally, buyers justify M & As on grounds of intangibles – brands, technology, distribution network et al but here there are none. Cupid’s assets are registrations and approvals, but the existing ones have been fully harvested and impending ones are at least couple of years away. And when the promoter is on record saying he is expecting “minimum Rs.300 per share”, it is unlikely someone will pay anything close to the current market price to buy the promoter stake.
The only other trigger is a possible buyback. Though Cupid has Rs.100 crore cash, note that a company can buyback only up to 25 % of its capital & reserves, which comes to around Rs.40 crore in this case. With Rs.40 crores, Cupid can buy back 8 % of its equity at say Rs.400 per share. This is a good proportion but does not help promoters exit the company, which is necessary for the business to realize its potential. At the most, it will help retail investors liquidate a part of their holding.
(Disc.: Holding)
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