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Vijay Malik by Dr. Vijay Malik - 1y ago

www.drvijaymalik.com has a dedicated section for investment & stock specific queries of readers: “Ask Your Queries”. Over time, readers have asked queries about multiple stocks in this section. We have answered these queries after doing post preliminary analysis of the stocks under consideration. Readers have found such analysis helpful.

“Analysis” series is an attempt to summarize & share with all the readers, the key questions and their answers, which have featured on “Ask Your Queries” section. The primary aim of this new feature is to share the knowledge with all the readers of the website.

The current section of this series, “Analysis” covers GM Breweries Limited, an Indian manufacturer of country liquor currently focusing on the Mumbai & Thane markets in Maharashtra.


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We conducted our third “Peaceful Investing” workshop in New Delhi on May 13, 2018. The workshop was aimed at sharing equity investing knowledge with the participants that could help them gain confidence while taking their equity investment decisions.

The presence of participants coming from places like Mumbai, Kolkata, Bikaner, Gwalior, Ludhiana, Moga and parts of Haryana and NCR to New Delhi made it a special occasion for us.

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www.drvijaymalik.com has a section dedicated to answering queries from readers: “Ask Your Queries”. Over time, many readers have asked their queries related to many aspects of stock analysis and sought clarifications about investing. We have responded to these queries as replies to their comments.

“Q&A” series is an attempt to share the queries & their responses, which have featured on “Ask Your Queries” section, with all the readers. The primary aim of this new feature is to share the knowledge with other readers of the website, who might have similar queries.

The current article in this series provides responses related to the following queries:
  • What to do when no company meets all the investment checklist parameters?
  • How to find out if a company has diluted its equity in the past?
  • How to determine if a company has lost money on its investments?
  • How to determine equity contribution in Fund Flow Analysis?
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Vijay Malik by Dr. Vijay Malik - 1y ago

www.drvijaymalik.com has a dedicated section for investment & stock specific queries of readers: “Ask Your Queries”. Over time, readers have asked queries about multiple stocks in this section. We have answered these queries after doing post preliminary analysis of the stocks under consideration. Readers have found such analysis helpful.

“Analysis” series is an attempt to summarize & share with all the readers, the key questions and their answers, which have featured on “Ask Your Queries” section. The primary aim of this new feature is to share the knowledge with all the readers of the website.

The current section of this series, “Analysis” covers KNR Constructions Limited, an Indian infrastructure player focused on EPC (engineering, procurement and construction) activities in the road and irrigation sector.

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Vijay Malik by Dr. Vijay Malik - 1y ago

www.drvijaymalik.com has a dedicated section for investment & stock specific queries of readers: “Ask Your Queries”. Over time, readers have asked queries about multiple stocks in this section. We have answered these queries after doing post preliminary analysis of the stocks under consideration. Readers have found such analysis helpful.

“Analysis” series is an attempt to summarize & share with all the readers, the key questions and their answers, which have featured on “Ask Your Queries” section. The primary aim of this new feature is to share the knowledge with all the readers of the website.

The current section of this series, “Analysis” covers Cupid Limited, a leading Indian manufacturer and exporter of male & female condoms and lubricant jelly.


Reader’s Query


Hello Dr. Vijay,

I am a regular reader of your blog, which I discovered a few months ago. I especially enjoy reading your company analysis, which you do after readers submit their analysis to you. In the same spirit, I have been observing an interesting company called Cupid Ltd. I have done the analysis for this company, as I think its stock seems attractive for the long-term.

Please have a look at the attached file and post your analysis on the website too.

Thanks, and let me know if you need any more info.

Regards,

Ruchik Chauhan


Cupid Limited


The business:

Cupid specializes in manufacturing male and female condoms, lubricants, and other products related to sexual health. It seems like the only listed company in India, which is primarily into this sub-industry of sexual health. There is no credit rating report available for this company.

Its major revenue comes from exports (as high as 80%), as seen below:


It is the leading company in India, which is qualified to supply condoms to UN/WHO related bodies. It is the second company in the world after Female Health Company to obtain a WHO pre-qualification for female condoms and is presently in the process of acquiring USFDA approval. Besides UN/WHO bodies, it also has agreements and relationships with governments of African states, which sanction procurement and supply of female condoms for their health welfare programs.
It is also worth mentioning that Cupid has a design patent on its female condom, in which it uses a special sponge based design to improve comfort, as opposed to the standard design of its competitors.

Financial analysis


Sales have grown four times since 2008, with ups & downs along the way. However, the overall trend has been up. OPM has also increased, especially post 2014. The major reason for this increase is the fact that the higher margin female condoms were introduced around that time. Margins on male condoms are around 15%, while they are close to 50% for female condoms. Cupid has also introduced additional products like hand sanitizers, which have high margins of close to 35-40%. Hence, we see a steady rise in OPM post 2014.

The tax rate seems reasonable at around the 30-35% mark.

Cash flow from operations is steadily rising, and that trend has helped the company pay off its debt, which in 2017 went to zero. Therefore, Cupid as of now is a debt-free company. A note on capex is written below as well to support this argument on debt reduction.



The company appears to have become more efficient, with certain expenses such as manufacturing expense as well as power & fuel having gone significantly down as a percentage of sales. This has happened simultaneously as sales have been increasing.

The reduced debt has also reduced interest expense, and a net result of all these events have increased profit as a percentage of sales in a major way.


CapEx requirements


Since 2008, total cumulative CFO is ₹45 crores, while CapEx has been only ₹12 crores. This gives a very healthy FCF to CFO ratio of 0.73 or 73%.

In recent conference calls, the company does intend to expand its manufacturing facility by spending ₹7 crore in the coming months. In terms of USFDA for female condoms, Cupid projects spending about ₹13 crore (2 million USD) over next 2 years. Therefore, the CapEx figure seen above of ₹12 crore will certainly be much higher due to spending in the coming months. The company plans to do QIP or take on Debt for raising these funds, but it remains to be seen what it exactly does.

The company also plans to spend significantly on marketing and brand promotion. It has planned to spend ₹11 crores for these activities and that will also be an added investment to the CapEx mentioned above.

Still, with healthy cash flows coming in and a confirmed order book of close to ₹73 crores should make it a smooth sailing in terms of these planned expenses.


Some ratio analysis


Asset turnover has steadily increased over 2009 to 2017, which means the company is making good use of its fixed assets.

Receivables have increased, which may cause more capital stuck in working capital requirements. This is evident from the fact that receivables, as a percentage of total assets has gone up from 3% to 19%.

However, inventory is being turned more and more, with the ratio having quadrupled since 2009. Cupid is certainly manufacturing and delivering a lot more, though it is not collecting its money as fast as maybe 2010-2011 period. If compared to an FMCG company, receivables are high, but not unreasonably high. Kirana stores also require 30 to 60 days to pay for the goods.



Market cap increase to retained earnings ratio is above 10, indicating strong shareholder value being created by earnings, which is not being paid as dividends, but rather getting re-invested in the company.


Market cap has also grown over the 2008 to 2017 period, which shows that the market is valuing the increasing sales, net profits and higher OPM of Cupid, and its promise in the ever-increasing sexual health market.

Management analysis

The company has been in search of a CEO for quite some time, and it still has not found one. Therefore, succession plan remains uncertain. The promoter of the company lives in New York, and recently cashed out almost 4% of his holding for purchasing a home in NY. Though not alarming, it is worth noting this point.

Promoter remuneration is around 56 lakhs, which is reasonable as well and nothing to be concerned about. Overall ceiling limit is 5% of net profit. Net profit in 2017 was about ₹20 crore, so 5% is about ₹1 crore, hence remuneration is well within the limit. Other directors and management personnel have salaries around ₹5 lakh range, which is also very reasonable. Board meeting attendance fee is close to ₹2.25 lakhs.

The ratio of director remuneration to median remuneration is about 19.5x. This ratio was about 14x in 2016, so it has gone up. Director remuneration increased 50% while employee average increase was 20 odd percent.


Points about domestic business

In terms of domestic market, the company has started selling on e-commerce websites and is planning to appoint distributors for offline retail locations. This was mentioned in concall of May 2017.

One potential threat to domestic business is the policy of Drug Controller of India. It had imposed price capping on condoms, which was challenged by Reckitt Benckiser (Durex condom) and JK Ansell (Kamasutra). The Delhi High Court ruled in favor of these companies and the condom product was not to be included in the DCI list of "essential medicines". However, such policy decisions can have a hugeimpact on Cupid's business, especially in the domesticmarket.

Another point is about the condom market in India. It is highly fragmented and competition can put pressure on margins, as there are many well-known players with much higher brand awareness than Cupid.

SWOT Analysis

Strengths
- Experience player
- Has pre-qualifications from WHO/UNFPA
- Debt-free
- Reasonable order book
- relationships with African governments and UN bodies
Weakness
- No CEO, uncertain succession plan
- Susceptible to competition and raw material price
- Capacity expansion is happening in existing building, for further expansion might need to buy or lease land and incur larger expenses

Opportunity
- Working on a partnership with a US firm for premature ejaculation product
- Diversifying into hand sanitizers and other products
- Female condom market can potentially be huge
Threats
- Larger established FMCG or HealthCare players enter the market for female condoms
- If Government and UN decides to reduce or stop funding on these programs, then export revenue (80% of total business) is in jeopardy


Regards,

Ruchik Chauhan


Author’s Response


Hi Ruchik,

Thanks for sharing the analysis of Cupid Limited with us!  The time and effort put in by you in the analysis of the company are clearly visible by way of references various sources like conference calls, annual reports, learning from public documents etc. We appreciate your gesture of sharing the analysis with us. It is beneficial to the author as well as the readers of www.drvijaymalik.com.

Let us first try to analysethe past financial performance of Cupid Limited.


If an investor looks at the financial performance of Cupid Limited over the years, then she would be able to notice that the past financials of the company present two marked different phases in performance.

The first period is leading up to FY2010 where the company has witnessed declining sales, operating losses and sustained debt. During this phase, the company’s sales declined from ₹24 cr in FY2008 to ₹9 cr in FY2010. The company’s profits witnessed a continuousdecline and it reported operating losses in FY2009 and FY2010. The company’s debt levels were sustained at levels of ₹6-8 cr. It becomes obvious to the investors that the business position of operating losses with continued pressure of finance costs would have led to a serious rethink in terms of business strategy in the company, which seems to have led to the onset of the second phase of business performance from FY2011.


This second period of business performance is from FY2011 to current times, which is characterized by increasing sales, improving profit margins, declining debt and rising cash reserves. During this period, the company witnessed the sales increasing from ₹9 cr in FY2010 to ₹83 cr in FY2017. The operating profits increased from losses in FY2010 to ₹32 cr in FY2017. The operating profit margin (OPM) increased from losses to 39% in FY2017. The company used the funds generated from improved business performance to repay its debt and it became a debt-free company in FY2017.

In light of such marked change in the business performance of the company with FY2010 as the watershed period, it becomes essential that an investor understands the underlying reasons for the same.

When an investor analyses the journey/milestones of the company over the years in the investors’ presentation released by the company in February 2018 (page 8), then she finds the key steps taken by the company leading to the improvement in the business performance:


Looking at the above “Cupid Journey”, an investor would notice that until FY2010, the company dealt mainly in male condoms and supplied primarily to Govt. of India (GoI) whereas, fromFY2010 onwards, the company started focusing on female condoms and started supplying to foreign governments.

While analysing various shareholder communication of the company, an investor gets to know that the male condom is a lower margin product when compared to female condoms and the years when the company could sell higher numbers of female condoms, then its operating margins have shown significant improvement. E.g. in FY2016, when the operating profit margin (OPM) of the company increased to 41%:

The FY2016 annual report, page 18:



Moreover, an investor also notes that the Govt of India (GoI) orders are low margin tenders when compared to export orders. This is evident from the company’s communications that the margins on GoI orders are in the range of 10%, which is significantly less than the ongoing operating margins of the company of 30-40%:

February 2018 conference call, page 12:


Therefore, an investor realizes that until FY2010, the focus areas of the company: male condoms and GoI orders were not remunerative enough and as a result, the company had to bear operating losses in years FY2009 and FY2010. However, the change strategy of the company to start manufacture of female condoms and focus on export markets/foreign govt. tenders bearing high profit margins have led to a revival of the company and as a result, the company is currently standing at a much stronger financial position when compared to FY2010.

Going ahead, the company plans to apply for Govt. of India tenders, which contain lower profit margins (February 2018 conference call, page 4):


As a result, the company may report lower profit margins going ahead.

Until now, the key focus area of the company was tenders by govt. department and similar agencies/donors (B2B); however, recently, the company has tried to increase its focus on direct sales to consumers (B2C). It seems that the..
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www.drvijaymalik.com has a section dedicated to answering queries from readers: “Ask Your Queries”. Over time, many readers have asked their queries related to many aspects of stock analysis and sought clarifications about investing. I have responded to these queries as replies to their comments.

“Q&A” series is an attempt to share the queries & their responses, which have featured on “Ask Your Queries” section, with all the readers. The primary aim of this new feature is to share the knowledge with other readers of the website, who might have similar queries.

The current article in this series provides responses related to the following queries:
  • Can we trust the work done by auditors of companies?
  • Is a credit rating mandatory for all the companies having debt?
  • How can an investor calculate the CAGR of a portfolio?
  • What do we do when the growth of a company slows down after P/E rerating?
  • How can an investor learn about industries, which are new to her?
  • How to combine standalone & consolidated financials of companies for analysis?
  • Role of depreciation in CFO and Capex calculations


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Screener.in is one of the best resources available to equity investors in Indian markets. It is a website, which provides the investors with the key information about companies listed on Indian stock exchanges (BSE and NSE).

We have been using screener.in as an integral part of our stock analysis and investments since last many years and have been continuously impressed by the tools offered by it that cut down the hard work of an investor. Some of these features, which are very useful for equity investors are:
  • Filtering of stocks based on multiple objective financial parameters. Investors can share these parameters in the form of “Saved Screens”.
  • Company information page, which collates the critical information about a company on one single page including balance sheet, profit & loss, cash flow, quarterly results, corporate announcements, links to annual reports, credit rating reports, past stock price movement etc. A scroll down on the company page provides an investor most of the critical information, which is needed to make a provisional opinion about any company.
  • Email alerts to investors for new stocks meeting their “Saved Screens”
  • Email alerts to investors on updates about companies in their watchlist.

All these features are good and have proved very beneficial to investors. However, there is one additional feature of screener.in, which we have found unique to screener.in. This feature is “Export to Excel”.

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