Indian CDMO’s – Charts

Best to read this post on a desktop

CDMO stands for contract development and manufacturing organisation

The CDMO industry started out decades ago as a niche service, offering additional manufacturing capacity or specialty services to pharmaceutical companies. The rise of the CDMOs was fuelled by failure stories in the pharmaceutical industry. In the past, pharmaceutical companies often installed dedicated manufacturing capacities for innovative drugs in development, only to see them fail during phase III of clinical research trials. Thus, the additional manufacturing capacity for the specific drugs was no longer needed. To reduce the risk of expensive over-capacities, the demand for outsourced manufacturing has been rising continually.

Source

In this post we will look at some players through charts to get a sense of whats happening in industry

While Divis Lab is the big daddy as far as market cap is considered, Jubilant and PI are emerging as contribution from their CDMO business is increasing to their overall enterprise revenues

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Suven – A New Beginning

The first thing that striked me as long term follower and investor in the company is the subtle sense of courage, aspiration and pride communicated by management when I was reading their annual reports

Yes there are two reports this time. In this post I will discuss Suven Pharamaceuticals and then will do a subsequent one on Suven Life Sciences. I have covered the company extensively and if you are new to the company then there is plenty of reading material here

Performance

The company has stopped given breakdown of research projects in various phases and prodding in concall also didn’t help to get this information out from management. This was a very interesting piece of data and as it provided us insight on their product mix. Also company has merged CRAMS revenue with Commercial Supplies so they are not available as seperate figures like last year

 

Segment (INR Crores) 31-Mar-2019 31-Mar-2020 Growth
CDMO 379 468 23.48%
Spec Chem 216 304 40.74%
Technical Services 50 70 40.00%
Total 645 842 30.54%

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Book Notes – Quality investing : owning the best companies for the long term

This is one of the best books for both new and seasoned investors to get their hands on. I did an earlier post on this book, you can read it here

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Below are my full notes
Building Blocks to look for in a company for Quality Investing
  1. Capital Allocation
  2. Return on Capital
  3. Multiple Sources of Growth
  4. Good Management
  5. Industry Structure
  6. Customer Benefits
  7. Competitive Advantages
Established Patterns to look for in companies
  1. Recurring Revenue
  2. Friendly Middlemen
  3. Toll Roads
  4. Low Price – Plus
  5. Pricing power
  6. Brand Strength
  7. Innovation Dependence
  8. Forward Integrators
  9. Market Share gainers
  10. Global capabilities and leadership
  11. Corporate Culture
  12. Cost to Replicate
More info here – link
Learnings
“Yhprum’s Law ,”  This is opposite of Murphy’s law which means “Everything that
… Read the rest

Book Notes – The Art of Thinking Clearly

The Art of Thinking Clearly  – Better Thinking, Better Decisions
By: Rolf Dobelli

As a Premium Subscriber – Now you will have access to searchable and tagged “Notebook” for all book highlights I read, It will look like below once you open the link in a browser

In the scorecard > Look for a Tab “Books”

I recommend bookmarking and saving it as a notebook in Evernote. I am hoping to add 10-12 books after editing them by year-end 2020 and then ongoing 5-6 every year

Now for some insights from this fantastic book

Habits

Small actions, repeated over time, transform us.

Survivorship Bias

Survivorship bias means this: people systematically overestimate their chances of success.

In daily life, because triumph is made more visible than failure, you systematically overestimate your chances of succeeding

should you never put your hard-earned money at risk? Not necessarily. But you should recognise that the survivorship bias is at work, distorting the probability of success like cut glass.

Failed and small businesses do not enter the stock market, and yet these represent the majority of business ventures.

Nature Vs Nurture

The author attributes a lot to Nature

swimmer’s body illusion – As with the swimmers’ … Read the rest

NBCC – Worth a Swing?

I learned the concept of Debt Capacity bargain from Prof Sanjay Bakshi vicariously and wrote on MOIL using the framework.

NBCC is looking like a similar opportunity e.g. in March 2020 it was available at a market cap of INR 2880 crore for few days, My calculations using optimistic and pessimistic average cash flow from operations are below

My Assumptions are

  1. Any bank would be comfortable with a interest coverage of 3X or even less given its a Mini Ratna government-owned company
  2. Have taken interest rate of 6% based on the latest GOI bond raising
  3. INR 750 crores cash consolidated level based on credit rating report and also this figure is similar to FY20 balance sheet number
  4. All cash is considered as excess cash( hence added to market cap) because they have a policy of executing projects against customer advances, which is also followed for real estate and redevelopment projects

 

Some other considerations positive

  • As a thumb rule in past investors have done well-buying business below 10 times their free cash
  • Decent dividend yield
  • they have an order book of INR 70,000 cr and counting. At 5% margin and assume they execute all the projects in the next 5-6
… Read the rest

Aarti Drugs – what to do with a fast 5 bagger?

Uncle Iroh is my favorite character in the animation series The Last Airbender

Uncle Iroh is known for his words of wisdom as he freely advises most of the other characters throughout the series, including his nephew Prince Zuko.

Zuko is preparing to battle General Zhao in an Agni Kai, a battle that will define their future, A Night before the battle Zuko asks for advice from Uncle Iroh to win this crucial battle.

Iroh’s reply was

Although his musings of wisdom are given within the constraints of the animated fantasy, most of his wisdom can be applied to one’s life and some in investing too.

Aarti Drugs Limited was established in the year 1984 and is part of Aarti Group of Industries, The Company is engaged in the manufacturing of

  • Active Pharmaceutical Ingredients (APIs)
  • Pharma Intermediates and Specialty Chemicals and
  • wholly-owned subsidiary- Pinnacle Life Science Private Limited focussing on formulations

For a company of its size (sub INR 5000 cr sales), it seems to punch above its weight targeting specific APIs / compounds and then gaining world dominance

 

And API is a tough business to be in

ADL has been continuously striving to keep its costs to minimum … Read the rest

Jump to Youtube

I have started recording new content on the youtube channel, subscribe to the channel to always get video in your inbox. Some latest videos are

1. Gold Investing
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Please let me in comments about what else you would like in upcoming videos.… Read the rest

Idea update & Ashiana AR Markings

Ashiana is a perfect example of a good company caught in an extremely difficult external environment. The industry was facing a slowdown and COVID is going to give a death blow to many, given their balance sheet they will survive but as Investors best is to forget that you own stock for the next 2-3 years.

My highlights from the Annual report can be accessed here
 
PS – Evernote highlights are best viewed on a desktop

Portfolio Addition

 … Read the rest

Buffett’s $1 Test on ITC

ITC is the one stock today which is splitting investing community in half

 

It has got attention from even famed traders

 

As good students of history we will go back to what Mr. Buffett had to say on management efficiency

“Unrestricted earnings should be retained only where there is a reasonable prospect – backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future – that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors.”

1984 Shareholder Letter

Now let’s put ITC’s management to this test, steps are easy

  1. Calculate retained earnings of ITC (net profits – dividends)
  2. Sum retained earnings for rolling five years
  3. Measure market cap delta against every rupee retained

here is the result

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CERA Sanityware – All’s well?

In my last update to you in 2017, I had pointed out that the Important variables to track for this company are

  1. Topline growth
  2. Return on Capital not impacted due to tiles expansion – Currently, it is about 30%
  3. New business growth
  4. No further declines in PAT margins (Somany’s margins are low – Pure Tiles player)
  5. Continued investment in branding and promotions

Let’s revisit all of them

  1. Topline growth has de-grown for the first time in many years in Mar 2020, management indicated in call that this was due to COVID lockdown in the last few days in March, the overall quarterly trend for last 2-3 years is also not inspiring

2. ROCE is steadily declining from ~30% to ~25%, part of the blame is tiles division, the other part is excess cash retained in the business (INR 230 crores)

3. Tiles business has grown from INR 170 cr topline to INR 265 Cr from 2017 to 2020 and they have added a new category called Wellness which caters to high margin audience

4. PBT margins are stable as per the above graph

5. These expense has been trimmed down and the company indicated in concall that  they can save … Read the rest