Buy Caplin Point Laboratories For 45% Gain: Stock Recommendation By ICICI-Direct

Thinking big after scripting unique success story…

Established in 1990 by first generation entrepreneur CC Paarthipan, Caplin Point (Caplin) is one of the fastest growing small cap Indian pharmaceutical companies. The growth story, so far, has been based on its unique business model with a strong, deeper presence in semi-regulated markets of Central America (CA) like Guatemala, El Salvador, Nicaragua, Ecuador and Honduras. It is also one of the leading formulation suppliers in these regions, with over 3100 product licenses globally.

To further expand its wings, Caplin is now entering the larger markets of Latin America (LatAm). It has also forayed into the high risk-high value US injectable market with its own manufacturing facility. We are positive on the company mainly due to its unique business model, leadership position in its key geographies & leverage free balance sheet with strong free cash flows.

Robust growth in emerging markets likely to continue

Emerging markets (EM) account for 92% of revenues and consists of LatAm- 88% (both Central & South America) and Africa- 4%. Revenues grew at 25% CAGR over a decade mainly due to 1) early mover advantage in these untapped markets, 2) geographical expansion (starting with two countries to 10 at present) and 3) ability to address market gaps, especially in the generics space (via trading model) with a hold on end-to-end distribution channels.

We expect growth momentum to persist mainly due to further expansion in the front end, increasing product basket, change in product mix and launching of own brands. Additionally, entry into South American countries is likely to propel growth. We expect EM revenues to grow at 21% CAGR in FY19-22E to | 1089 crore.

Foray into high risk-high return US injectable market

With a calculated approach to focus on injectables in the US, the company established an injectable plant in Tamil Nadu in 2014. Currently, the portfolio comprises 16 filed ANDAs, of which eight have already been approved. Currently, the company has ~35 products in the pipeline. In 9MFY20, revenue contribution from the US increased to 8% from just 2% in FY19. We expect US revenues to grow ~10 fold in FY19-22E to ~| 161 crore on the back of incremental product launches.

Valuation & Outlook

After scripting a unique story by growing in uncharted territories, Caplin is looking at growth in known markets. These new markets of South America, US are a big opportunity but fraught with new challenges. That said, we continue to believe in Caplin’s capability to replicate the success story in new markets. Secondly, despite likely dent in margins, return ratios due to investment phase in new markets, these prints continue to demonstrate earnings, balance sheet strength.

We have a BUY rating on Caplin with a target price of Rs 500 (12x of FY22E EPS of 41.7). We believe the company offers a compelling risk-reward scenario at current valuations. Similarly, the resilience shown by pharma stocks in the current Covid-19 related upheaval also offers an ideal platform for new idea generation like Caplin.