Moneycontrol
May 05, 2015 07:04 PM IST | Source: CNBC-TV18

Granules India may become a multibagger: Basant Maheshwari

According to Basant Maheshwari, founder, The Equity Desk one should look at sectors where there is degree of predictability. He recommends looking at pharma and intellectual property rights (IP) space.

Basant Maheshwari, founder, The Equity Desk and author of ‘The Thoughtful Investor’ in an interview to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, spoke extensively on new themes that could be looked at in market today.

According to him one should look at sectors where there is degree of predictability. He recommends looking at pharma and intellectual property rights (IPR) space. Home Finance space also remains a good theme for the long-term, he says.

He is very bullish on Granules India from the pharma space and expects it to be a multibagger.

Currently, it is very difficult to find companies with a CAGR growth of 20-25 percent.

Below is the transcript of Basant Maheshwari’s interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy.

Latha: What is the new theme that is interesting you? Home finance has played out. Do you think it is not something you would chase? What is the new theme?

A: Home finance hasn’t yet played out. With an eight percent mortgage to Gross Domestic Product (GDP) ratio this can just go up. The question is - is the investor patient enough for his investment.

Latha: How long will it take to play out, ten years, five years?

A: Twenty years. But obviously stocks don’t move up in a straight line and that is what is happening. Coming back to the other argument which I think now is it has become very difficult for companies to promise you 20-25 percent Compound Annual Growth Rate (CAGR) over extended periods of time. The capital expenditure (capex) cycle - I don’t know whether it is going to come or not but first my little argument is that existing capacities have to be used. Once the existing capacities are used, the companies will invest into capex. And companies will do capex not because the government is telling them to do but because the return on capital would exceed the cost of capital. But the cost of capital hasn’t yet come down and there is no sense when the return on capital would go up because of the demand and other thing.

So, one thing which I have been looking at of late is pharma and Intellectual Property Rights (IPRs). I hadn’t looked at it earlier because I thought pharma we can’t understand when the US FDA comes and then slams down and things like that. However, it just got a little easier now because most of the drugs are going off patent and US is a USD 150 billion opportunity.

So when you sell a patented drug you sell it at USD 150 and when it goes off patent the price crashes 90 percent. So, suddenly the price becomes USD 3-4. So with USD 3 selling price you cannot produce the drugs in Florida or Chicago or California, you have got to come back to India. So that is a huge opportunity waiting.

However, even in the pharma space there are two types of companies, one is the magic shows companies like Natco going for Copaxone with 180-days exclusivity, which you get or don’t get it. The question is what happens after you get it and what happens after 180-days exclusivity. It will be difficult to get a higher PE multiple then.

So, I just tried to look at sectors or companies where there is some degree of predictability.

Latha: So which is the company you have spotted?

A: I have spotted a couple or more but one of them is Granules India which I own obviously and my purchase price is more than the cost price today, which has gone down. I haven’t bought it for one, two or three years but it is a longer- term bet. So, if you look at it over a period of time they have transformed.

In markets we get paid not for what is constant but for what can change. So over the last ten years company has increased sales at 26 percent CAGR, profits have also increased. It was basically a Paracetamol company. Active Pharmaceutical Ingredients (APIs) which are the low EBITDA margin business formed 90 percent of the company but by 2009 that has came down and formulations is going up. Formulation is the place where you make more margins 20-25 percent EBITDA. So, from less than 10 percent formulations in 2009 we are now making 40 percent formulation - the sales mix. That is supposed to go to 65 percent. So there are several interesting things happening in this company.

Sonia: They have already done really well, if you pull up the 12 month chart, 12 months back they were at Rs 40 and now close to Rs 90. So doubled already, but in the quarter gone by the numbers have not been so great. So, Rs 22 crore profit versus about Rs 25 crore last quarter, something going wrong?

A: No. This company was basically doing the core molecule business. They took over a company called Auctus which has 12 products in the API space and they turned it around last year; last quarter it actually turned around. So the result that you see has the Auctus element built into it.

Out of the 12 APIs they would file for four Abbreviated New Drug Application (ANDAs) this year and maybe four next year. Once those ANDAs get approved then this company, the profile of Auctus would also increase. So that is why the results for this quarter were a little weak, and they had some capacity constraints, so they couldn’t actually manufacture something because their capacity took a little and moreover this is not a free cash flow business. It is not a Page Industries or a Nestle, or a Hindustan Unilever where you just get free cash flow and you distribute it.

It is a company where when you get the cash you put it up for capacity and you have ready buyers outside, those buyers tell you, this is what we want from you. So, this is the other side of the story. However, for the last 10 years it has been consistent with 26 percent sales CAGR.

In pharma, I have seen one thing no matter what you do you don’t get killed. How many times have Wockhardt and Aurobindo bundled it up? Still they rise, but in infra one wrong step and you are on a land mine. So, pharma just gives you the chance to rise again and again.

For the entire interview watch video

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