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Cupid Limited: The sleeping giant or value trap?

Disclaimer: This is NOT an investment recommendation. Please conduct your own diligence or consult an investment advisor for your investment decisions.


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With the COVID crisis looming, pharma shares are seeing a bull run since April. On the back of it, I started the hunt of some pharmaceutical companies available at cheaper prices. Last week, I found a company called Cupid Limited.


Business context


Incorporated in 1993, the company started the manufacturing of male condoms in 1998. In the early 2000s the company received the first order from the Ministry of Health & Welfare. Till 2010, the company only used to cater to Govt. of India tenders. However in 2010, the 2 main developments happened:

  1. Cupid received the permission to manufacture female condoms

  2. Cupid started catering to the orders from Government from abroad

In the current context, the company caters to 4 types of clienteles:

  • WHO & UNFPA

  • Tenders floated by large buyers (countries like Tanzania, Brazil etc)

  • International NGOs

  • Private buyers (Cupid act as a contract manufacturer for them)

In 2015, the company started dabbling into direct consumer products like lubricant jelly and their own branded condoms. The company tasted a very limited success and hence backed out of this venture.


Key Focus Areas


Going into FY21, the management had three key focus areas

  1. New Category Development: Cupid wants to enter the new categories related to female health and wellness

  2. Strengthening Distribution Moat: Strengthen digital marketing and increase retail footprints for their direct consumer brand

  3. International Growth: Cupid is in the advanced stage of setting a JV in South Africa for the manufacture of female condoms, since this is a high margin product and a nascent category

With the onset of COVID 19, they have started out manufacturing the health related devices which they pointed out in their calls. They are expecting a revenue forecast of 20-30 cr from these devices business



Financial context

Following points become clear:

  1. On account of international tenders, the company’s asset utilization started increasing from 1.5 to ~5.5

  2. The company’s ROCE started moving in the range of ~40% after the venture into female condoms

  3. Company is able to collect its receivables in less than 3 months

  4. Company is able to convert ~70% of PAT into operating cash flows


On the governance front, there were a few issues related to issuance of warrants and lending to related parties, but the transactions weren't too material.


Wrapping up - What's good?

  • Moat in the form of only one of the four authorized female condom manufacturer in the world along with the patented design

  • Prudent Management with the continuous generation of high ROCE and carefully planning the capex

  1. In the concalls, it has been repeatedly pointed that they would not undertake the capex till they have some solid visibility of the order line for the next 5-6 years

  2. Till then, they would be undertaking additional manufacturing as a part of joint venture

  • Highly lucrative new business lines with the clear order book for exports

  • Efficient conversion of PAT to CFO

  • Decent valuation of 9.6 times earning given the growth rate and ROCE

  • Imminent entry in the following giving the boost to income:

  1. US Prescription Market

  2. Export of medical devices with the order book of 30 cr


Wrapping up - What's isn't?

  • No management succession plan as OP Garg is 70+ years old.

  • Low switching cost by the customer, i.e., government since they have to take out tender for every contract

  • Issuance of warrants to increase the promoter’s stake

  • Vagaries of rubber price fluctuation which affects COGS

About the Author: The post is written by our EZPP partner Manu Jindal. Manu is a graduate from IIM Calcutta, currently working with Airtel Labs. He writes about Payments & New Tech at ZappChai.

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