Caplin Point Laboratories has shown remarkable progress and continues to be on a growth path. Earlier, in July 2022, we recommended that investors accumulate the stock, and the stock, after returning 90 per cent, is still poised for further growth. At 18 times one-year forward earnings, it is at a premium to its historical valuation range of 16 times. But considering earnings growth visibility and modest valuations compared to bigger players (averaging 23 times one-year forward earnings), we reiterate the accumulate call on Caplin Point.
Latin American markets
The company has an end-to-end model that has served it well over the years in the lesser-known Latin American markets of Guatemala, Ecuador, Honduras, and 23 other countries, including Francophone Africa. In 9MFY24, this segment accounted for 85 per cent of its revenues, with the US making up the rest. The company acts as the manufacturer, importer and wholesaler in each market. This eliminates intermediates, provides on-ground intelligence and persistent relationships with local retailers/doctors and distributors.
The revenue growth from the market has slowed in the recent periods — from 19 per cent CAGR over FY19-23 to 14 per cent YoY in 9MFY24. Established markets and saturation have impacted the growth. The next leg of growth from LatAm markets will be driven by softgels, oncological products and presence in larger markets in regions such as Mexico, Chile and Brazil.
With semi-regulated market status, a larger portfolio of products was needed to justify the costs associated in these regions. Caplin Point has secured 24 filings in Mexico, with approvals for five. The company plans to build a portfolio of 60 products in the region in 2024, enabling it to build a presence in the market. Softgels and oncological production lines meant for existing and regulated markets, recently commercialised, will enhance Caplin’s presence in larger semi-regulated markets.
The company will look to building a manufacture, import, and warehouse model even in these markets. This implies a slower build-up in the region but also a long runway for growth. A significant pick-up in revenues should be built in next two years from these markets.
Caplin Steriles
Caplin Steriles is a 100 per cent subsidiary of Caplin Point, incorporated for US and other regulated markets business. The segment is in a high growth phase, with 67 per cent YoY growth in FY23 and 40 per cent YoY growth in 9MFY24.
The manufacturing facility received its US FDA clearance recently in Q1FY24 and has also started a new Line-5, which handles injectables with state-of-the-art manufacturing facilities. Legacy manufacturing lines are also being upgraded.
Caplin Point has secured 25 approvals so far for its US markets, which it has been partnering for sales in US (50 per cent profit share). There are 14 more products under review and the company expects to launch seven products in CY24. It has invested in creating a front end in US market and will look to continue both partnerships and marketing via its own front end.
Replicating its LatAm model in the US, Caplin will look to tap into smaller, uninsured or under-insured markets, avoiding larger players by reaching out to hospitals, smaller purchasers (GPOs) and insurers. The company has gained strong traction from existing facilities and recent line additions. Softgels, and also oncological facilities, will support further expansion in US generics markets relying on its own differentiated model which has delivered returns for the company.
The company is accommodating three activities: exhibit batches for future generics, commercial production for new and existing products and also complex formulations, including lyophilized injectables or insulins (import, trials and exports). That the company’s US foray is coming at a time of severe shortages in generics, and lower intensity of price erosion is also a positive.
Capacity expansion
Caplin Point is in the midst of expanding its capacity with an outlay of ₹830 crore of which ₹460 crore has been deployed in the last three years and the remaining expected to be deployed in next three years. Internal accruals funding this expansion has allowed the company to execute the plan with midway changes and is also the reason for such extended timelines.
A softgel facility and automated Line-5 that doubled the existing capacity have been commercialised in the last one year. Oncology oral solids plant, injectables and an Onco API plant are expected to be commercialised in the next one year, starting with oral solids facility in the next six months. The oncological expansion should drive the next leg of growth for Caplin, addressing both regulated and unregulated markets with orals and steriles.
Caplin Point, relying on imported or outsourced manufacturing for 30-40 per cent of its sales, is also adding a general API plant, which should improve backward integration, regulatory adherence, and cost-competitiveness in the long run.
In its steady expansion over time, Caplin Point has maintained an EBITDA margin of around 30 per cent and is also debt free. The company should have a net cash of more than ₹800 crore as of December ‘23, sufficient to see the current expansion plan through.