Another sucessful completion of inspection at Caplin
ANVISA- Brazil conducted an inspection of Caplin Steriles’ injectable and ophthalmic manufacturing facility located at Gummidipoondi. The inspection was conducted between August 12th and 16th, 2024 and concluded with zero observations
This will help Caplin to get into Brazilian markets and eventually to Chile and Peru. Thier business model is based on opening of warehouses in the country they enter and establish distribution, this sucessful inspection means that they will be able to cater the brazilain markets with more products of better quality and when their products portfolio reaches 30+ they can open a warehouse in Brazil ( with fewer products warehouse in not economically viable according to the management )
Quarterly results also robust and management commentary also encouraging

Disc : Not a buy/sell recommendation. Not Sebi registered.( Invested )

The company has Rs 37,380 Cr of legacy loans (housing + developer finance) on their balance sheet as of June 2024 as per their Q1 earnings update. The market seems to be saying that all of this book will likely go bad (maybe that’s why they haven’t been able to unload it yet in the first place) and given their track record of 70% recovery from bad loans, the hit will be to the tune of Rs 11,000 Cr. Hence, discounting the same from their current net worth of Rs 20,000 Cr gives you Rs 9000 odd Cr of market cap.

However,

a) the company already has imputed provisions of Rs 6000 odd Cr from the written off pool which the market is not accounting for, and

b) not all or even a majority of the legacy book is likely to go bad (my opinion)

Nevertheless,

The management seems to be indicating that a substantial portion of the legacy book is likely to be unwound after requiring some provisioning and that’s why there is no talk of write-back of provisions from the expected recoveries (and all the jargon around “tactical” actions to reduce the legacy book which is nothing but another way of saying that we will require to provide for some part of the outstanding legacy loan book before either offloading it or running it down over the normal course of loan repayment)

Lastly,

All of this ultra cautious approach could also be a ploy by the management to keep the share price depressed till 30-Sep-2024 when the optional put option will be exercised by the FCCB holders. If the share price were to rise before that, the FCCB holders could simply exercise the conversion option and add 5 Cr shares to the already large number of diluted shares after the Rights Issue. The FCCB conversion price is somewhere in the handle of 200 Rs per share but am not sure.

The management is also working on another ESOP plan which was approved by the board in Feb 2024 but implementation was deferred till after all the name change and KRAs for performance evaluation (the eight metrics they started reporting on since Q1)
were implemented. Lower the stock price, lower the strike price for their ESOPs since ESOPs are awarded at the market price of the day to avoid P&L hit.

My take on business performance going forward –

The increase in profitability will be gradual but steady over the course of next 8 quarters. The management will ensure that there are no surprises on the positive or negative side going forward. Not sure about the figure of 4000 Cr p.a. as I still don’t understand how the ROE of 18% will be achieved without substantial leverage. If the 18% ROE is after accounting for provision write-back sometime after 2027, then it is not sustainable.

At some point well within the next two years, the market will get enthused by the steadily rising asset light AUM and earnings as well as reducing legacy book and assign a higher book multiple to the share.

Disc: Invested with a large holding

Unlike other major banks, Kotak Mahindra Bank has unlisted major subsidiaries. Ideally kmb should get better p/b value compared to all other big banks.