Enen though name change and sector change ( from crop protection to healthcare) has been corrected in the BSE page of 3 B BlackBio Dx Ltd., the following values- EPS (TTM), CEPS (TTM), PE, PB and ROE are wrongly displayed on the BSE page.
The values are based on the standalone financials of Kilpest India Limited. To represent the true value of the company to the public, somehow this error is to be corrected by bringing in the attention of BSE.
Similarly 3 B BlackBio Dx Ltd. is still categorized as a crop protection products company in majority of the portals like The Economic Times, Money control, Tickertape, Mint, MarketsMojo and similar ones.
The company is tabulated among crop protection products companies in the peer group section of all these portals.
In 9 months ended on 31.12.2023, 82% of revenue and 94% profit before tax are from diagnostic segment.
These are to be corrected somehow to get a true picture of the company to the investing community.
https://www.bseindia.com/stock-share-price/3b-blackbio-dx-ltd/3bblackbio/532067/
Disclosure: Invested

Current costs are roughly $3.5-5/kg for Green, $1.5-2.5 for Grey and $0.75-1 for Black/Regular hydrogen.

Techno-economic assessment of green hydrogen production integrated with hybrid and organic Rankine cycle (ORC) systems – ScienceDirect

Very simply, the Paytm subsidiary that buys this PA co… will have to hire some senior leader from a major bank as “management”.

As of February 20, 2024, Rain Industries’ (RAIN) share price was Rs.217.95. Over the past year, RAIN’s share price has increased by 28.51%, and over the past six months, it has increased by 40.43%.

RAIN’s Piotroski F-Score ratio is 3.00, which is lower than the average Piotroski F-Score of 6.40 over the past five years.

RAIN’s other financial ratios include:

• PE ratio: 22.49
• Earning per share: 8.04
• Price/sales ratio: 0.27
• Price to book ratio: 0.68

RAIN produces carbon, cement, and chemical products. It has a production capacity of 2.4 million tons per year of calcined petroleum coke and a total distillation capacity of 1.5 million tons per year.“An oversold de-leveraging play” typically refers to a situation in the financial markets where an asset or security has experienced significant selling pressure, driving its price below what might be considered its intrinsic value. “Oversold” suggests that the asset’s price has fallen too far and too fast, potentially creating an opportunity for investors to buy at a bargain. “De-leveraging” refers to the process of reducing debt or leverage, which may be happening in response to market conditions or specific events affecting the asset.

In essence, an “oversold de-leveraging play” implies that investors may see an opportunity to capitalize on the asset’s oversold condition, betting that it will eventually rebound as the selling pressure subsides and the market adjusts. This strategy often involves buying the asset at a discounted price with the expectation of profiting from its eventual recovery. However, it’s important to note that investing in oversold assets carries risks, as there’s no guarantee that the asset will recover or that the selling pressure won’t continue.

I have been interested in this company for a while. During my initial look 1.5 years back, I didn’t find the company exciting enough or see any long-term potential. But on a second viewing, I found this company interesting enough to go deeper. I think the company is extremely interesting for the following reasons.

1. Asymmetric bet – The Indian dental consumables market size is around 1000 crores. The company earned around 25 Crores from the domestic market which accounts for 2.5% of the market share. Assuming the company improves on its products and can capture a 10% market share can result in huge revenue growth over the long term.

I believe it is not a hard shot that the overall Market at some point can be around 1500 (maybe even 2000) crores by the next 5-6 years. And getting as low as 10% market share will result in a huge revenue growth domestically. My bet is that market share will increase in the coming years because of more acceptance by dentists and better marketing.

2. OPM – Currently their OPM is around 40%. It fluctuates to around 30% in some quarters. Taking a first look at this makes it seem too good to be true given that distributors get a better margin for their products. That must mean they manufacture the products extremely cheaply. Management claims that EBITDA margins may increase in the future. Executing that in my opinion would be extremely tough.

3. Exports are one area that I am optimistic about. The advantage of being a low-cost producer and selling it in markets way bigger than India with higher margins does open room for a lot of possibilities. They have 20 USFDA approvals as of now (May 2023 concall) and have a dedicated distributor for the next 5 years (while also doing small private labeling for some companies in the USA). Some con call snippets on the USA and international market.

” So first of all the first challenge was to get our products FDA registered because the US is guided by FDA process this thing, and these are Class 1 products, so these have to be FDA certified. We got them certified and now we are evaluating different opportunities to grow in US which is a much bigger market. But as you would understand, we just recently entered that and it would take some time for us to capture the US market. ” (Nov 2023 Concall)

**The international market is a huge market. It is a $20 billion market. And this is like a notion we are a very small company compared to the other multinational companies, but it’s a huge market. The huge market is about $25 billion market for the dental material. America is the biggest market, there are about $8.5 billion in the American market and the rest of the world together, Asia is a very big market, and Europe is a big market, but America is the biggest market. So $8.5 billion is the present market size of the USA.

They have started registering their products in Brazil, Australia, and NZ and already doing business in Russia. Currently, they are growing well on exports by the year and it signifies shows that their products have a high probability of being used in the future as well.

4. The balance sheet is very clean. They have around 40 Cr in cash at hand with around zero debt. This allows them to undergo a CAPEX in the coming years without taking on leverage. Currently, they are operating at around 40% Capacity. It means the company doesn’t need any big CAPEX for quite some time. And gives them room to grow revenues without any capital outlay. Management claims productivity can be enhanced by more shifts/ longer working hours once they reach 80-90% utilization. Also, they estimate that their current plant can deliver 150 Cr of revenue.

The total investment and research on the research and development and setting up of the new facility was about INR35 crores. So we had only INR17.7 crores for the capital expenditure. The rest of the amount was the investment in the land and building and other durables. So out of the INR17.7 crores, we have spent about INR7 crores on the R&D INR10 crores is for the new facility, and rest of the investment has come from our internal accrual.

5. Another thing I like is their renewed focus on marketing. They have incorporated “Denvisio Biomed Limited” as a marketing company for their products. Marketing growth can lead to more awareness and better revenues. Management in concall has claimed that they will be extremely conservative in the past on sales and marketing. Currently, some dentists still avoid using their products and they may change their opinion slowly and steadily as products get better. Some snippets from concalls.

They have hesitation. Despite their hesitation, we are growing. We have grown 30% in the domestic market. It is not that all dentists are hesitant to use the previous. There is always a mindset, there is always a preference for one particular type of product. So we cannot say that the dentists are hesitant to use our product

In this industry, all companies sell via distributors. And they in turn sell to dealers and sub-dealers. No company sells directly (except some sell online). A way to check management focus on marketing and ground reality of company products would be to talk regularly to such distributors. And they also try to sell to institutes, academia and budding dentists as over the long term, it will make dentists more comfortable with using Prevest products.

Top 10 products contribute 30% of revenue and they have around 10% market share on them. 50% of the business comes from North India while rest of India makes up 50%. Exports are around 45% of their turnover as of yet.

Growth areas – They are also entering medical device disinfectant market which is USD 2 Billion-dollar market worldwide (they just need regulatory compliances in order). They might consider custom manufacturing for other brands in future.

My scuttlebutt

So, I did a little scuttlebutt on the ground in North India by checking up on few local dentists and a distributor.

I did a scuttlebutt with a local dental distributor in North India to understand more about the dynamics of the dental consumables market.

Some of my insights were:

1. Other than Prevest, the other major Indian-origin dental company is PrimeDental. There are few other Indian players as well. Indian players have a price point that is way lower than MNC counterparts such as 3M, Shofu, Ivoclar , etc
2. They see more focus on marketing these days from the company. This goes in line with company claiming in concall on their push in marketing and hiring a well-paid marketing executive (who is also their son-in-law).
3. Dentistry is a competitive field. There are many new dentists out there trying to build their name and margins are low. Thus, many dentists like to reduce their costs with decent quality Indian counterparts to earn a few extra bucks. Thus companies like Prevest seem to appeal to many dentists especially ones who have started practicing.
4. The quantum of products in the Dental consumables market is extremely high. You need to just take a short look at the product catalog for that. Thus it is hard to figure out revenue by products. But the way the market works is that every company has a few products that stand out among the rest of the crop. Very similar to certain drugs of certain companies being favorable in the pharmaceutical market. This kind of market leaves space for a lot of players to grow.
5. The margins the distributor got were higher in Prevest and Prime than their MNC counterparts. Thus, higher margins do give impetus to distributors to sell more and push the product.
6. The quality of their products has been inferior over the years. But things are getting better recently and acceptance among dentists has started increasing. More acceptance will lead to better long-term tailwinds for the adoption of their products by dentists.

Other than that, I spoke to a few dentists.

1. The first dentist sent a fairly positive review of Prevest Denpro products. He said they are mostly middle-tier and widely used.
2. The second dentist (who is also an investor) wasn’t positive about the company and didn’t look at it much. But acknowledged their products can be better now compared to a few years back
3. Third dentist used some of their products often.
4. Another famous high-end dentist in the city has a fixed set of supplies (mostly 3M) and doesn’t like to change what is working well for him. It also should be implied that the ortho-dentist mentioned is a premium one and charges high to customers as well.

So, I guess the way the market is positioned is a lot more complicated and companies like Prevest have a distinct customer base of their own.

Risks

1. Management risk is there. It is there in every micro-cap company due to lack of data and limelight. A few things that stood out for me:
   • They claimed on concall that they have excellent quality products. Any dentist can make sure that this is a bit overboard.
   • Salary of 10 lakhs per month and 2% commission for son-in-law. That is high for anyone in a company with a turnover of around 50 crores. The company defended him saying he has experience and skills and should be adequately compensated. Regardless, I do believe incentives can be a powerful trigger for sales. Let’s see how this works out.
   And during the domestic market, he will be offered, he has been offered an incentive of 2% for his efforts in taking this business over the existing business level of INR20 crores. So, this is nothing we know it is just an award of 2%

The salaries are as Atul Modi – 1.2 Cr, Namrata Modi – 1.24 Cr, Sai Kalyan – 31 L. That is high for a 50 Cr revenue company. Atul Modi is getting old and Namrata Modi doesn’t seem to add any significant value to the company.

• No ESOP to any employees, which I believe is good. Management discussion and analysis in AR do not contain much useful information or insights. Neither is it descriptive. Their banker is HDFC Bank. It looks clean to me on the Related Party transactions side and bad debts/ provisions/other expenses side.
• They have a litigation case pending to direct tax but don’t acknowledge the same in AR 2022
• They added 97L of vehicle assets in FY22 which is probably a BMW X5 if you see company photos. Might have bought it before or after IPO in Oct 2021.
• The company hasn’t complied with some accounting standards in the past, and they corrected them in updated financial statements.

Regardless of all this, I believe every micro-cap in the country will have some concerns with the management. It is how they evolve accordingly with growing topline that is something to watch out for and can lead to value creation. They have increased topline and marketing in previous years alongside entering new territories which looks promising to me.

2. Growth/ Valuation risk- The way the stock is priced, the market expects some growth from this business on the earnings front. But that seems true for every stock in this richly valued market. Neither was their last quarter any promising. So, a lack of growth coupled with falling valuations is a potential future risk.
   Also, they are facing short-term headwinds in exports, but I see this story from a long-term perspective

As we have already informed you there is a decline in the export revenue in this quarter because of the prevailing recessionary situation in the world and also there are foreign exchange prices in many countries. We are facing this situation, but very optimistic that we will have a good business in this quarter and we will present a good set of numbers for this quarter. (Nov 2023 concall)

Conclusion

In conclusion, this to me seems a very interesting asymmetric bet. The promoter holding is 73.6% which implies good skin in the game. There aren’t any major FII or DII holding the stock. The balance sheet and OPM are amazing. Neither are there any major marquee investors except a couple of unknown names. So, the story is quite undiscovered yet (or maybe I am missing something out).
The valuation is a bit on the higher side. At the current Market Cap of 430 Cr, the company earned around 17 Cr in the past year. But as a microcap, the growth can often ease off valuation concerns. However, I do believe that there isn’t as much Margin of Safety as I would generally like in this stock as a lack of revenue growth can lead to PE de-rating.

I do agree there is some uncertainty regarding whether they can take market share or maintain their OPM. There is some lack of clarity. But the price of clarity in markets is expensive. I do think that from a long-term perspective, the company can do extremely well from its CMP due to the size of the opportunity. Even though reality can sometimes have other ideas.

Do let me know what fellow VP’ers think about this scrip!!!

Disclosure: Invested small %age of PF. I would look to add/reduce according to how the story develops.