Sumeet Nagar Recommends multibagger pharma stock for portfolio

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Srilata Rao
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Sumeet Nagar Recommends multibagger pharma stock for portfolio

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Sumeet Nagar, MD, Malabar Investments, has recommended Neuland Labs as multibagger stock pick.

In the jungle where you hunt, essentially the mid and the small cap space – with companies in the range of about $1 billion to $5 billion market cap -- that is where all the action, excitement and euphoria is. So is this a horrible, miserable and a terrible time for an investor like you?

No, it is not. The great thing about being in this space -- and we look even below the range you mentioned, starting $100 million or so -- is that you can always find some place because there are just so many people. It is like being in a forest with thousands of trees. So yes, not all the trees would grow but there are some that would definitely grow.

Where have you planted the seeds?

We have been strong believers in the consumption theme. I have shared that before. With increasing income, with the demographics that we have, people desire to consume, it is just one of those very basic natural instincts that always stay and as people earn more, as affordability increases, they are going to keep consuming more. We keep finding ideas that are in that space, adjacent to that space and where we see a long enough run way of growth and we invest in those.

You have a very large exposure to NBFCs and the one which stands out is Cholamandal. Given that there has been a big reset for PSU banks, NBFCs may just struggle in future because up until now, NBFCs have managed to grow because banks were not lending aggressively. Is that a structural risk for companies like Chola now that banks will get aggressive with all the money suddenly?

Yes. There are two points. One is obviously it is very good for the system. The fact that the PSU banks which were struggling, have got is good for the overall economy but it does not solve the problem. It is a fix. If you take analogy, it is like a patient who is waiting for a treatment. This is like the glucose saline solution. It does not cure the problem. It just strengthens you little bit so that you can bear the treatment and the treatment is that you need to take those losses and that is yet to come.

I do not think fundamentally it will change the trajectory of those banks meaningfully. Rather, it would allow them to grow a little bit. Previously they were completely struggling and in that sense yes they may take away some share back from NBFCs. So that is true but if you look at NBFCs or the small finance banks, there is a role for them to play and they will continue to play that.

So you are in no hurry to log out of Cholamandal?

Chola is like some of the other players like that, have a good future ahead of them. I think the key thing is execution and I would say if anything, a bigger worry or uncertainty is how the leadership change will impact that company.

There has been a leadership change.

Yes, I would say that is a bigger uncertainty and we need to see through how the leadership change impacts the trajectory of growth of the company but I do not think the PSU capitalisation impact that in a meaningful way.

You have a very strong reputation and markets and investors are aware of your potential to identify multibaggers -- whether it is Avanti or or Vaibhav or Eicher. Every time you come on my show you are expected to say something new and something big. In last six months, that is two quarters, which are the three names you have acquired?

I will talk about things which are already in public domain, We have done investment in Neuland Labs. We made investment in the public company. We also acquired a stake in the holding company. Both are getting merged together. We think it is a terrific company in a very good space. In some ways, the entire healthcare or pharma industry is getting beaten down but there are always exceptions, companies that are on a secular growth path and we think that Neuland is one of them.

There is a terrific management team that can capitalise on that potential.

What is so unique about Neuland?

It is very tough to convince and drug innovators in the western world to give access to their IP, to their molecules for custom synthesis. You need to build tremendous amount of trust before somebody allows you to do that….


And they are third party manufacturers?

They are third party manufacturers but for innovator drugs. It is a very big difference compared to building APIs for generic companies versus partnering with an innovator to help them through their sort of drug discovery process through phase I, phase II, phase III.

It requires a lot of coordination. It requires a lot of trust. It requires a lot of chemistry skills because you are not just mass manufacturing, you are experimenting, you are coming with a better or cheaper or more efficient ways of coming up with something and it takes many years to build that reputation and that comfort. They have done that and it is now up to them to keep executing to get more customers, to get more molecules with those customers and as they do that, business can grow multifold.

Neuland essentially is a third party manufacturer but they are making products which are slightly complex and complicated in nature and that explains why margins are strong. What happens if the buyers of innovator drugs here, witnesses serious pricing pressure? Could that have an impact on Newland’s spread or profitability?

If you look at an innovator drug, the cost of API is somewhere between 1% and 5%. It is negligible and in most cases, if it is a new drug, it is going to be patent protected. So, there is no pricing pressure per se. All this concern around the generic products and so forth does not really impact them because they are in a slightly different category.

Obviously they do have some exposure to generic APIs which is the manufacturer but if you are looking at the company over the next five to 10 years, the balance is going to be shifted towards these more complex innovative products, more custom synthesis and that is where the margins are significantly higher and you are more protected to the generic API market.

Avanti has been a multibagger investment for you. I was looking at data in the morning and I think the stock in the last three years has emerged as one of the best performing small cap stock, sub 14 times. Are you still happy to own it?

We still have a sizable stake. We have trimmed our exposure a little bit. We do not want any position to become very large in the portfolio but it has been a phenomenal investment for us and it is because the company is doing a phenomenal job.

Are the problems in Thailand behind them?

The problems in Thailand never impacted them. The Indian business was never impacted. In fact, if anything, it benefitted from the problems in Thailand. Most people had shared that with you before as well, that people were very concerned about the risk in this business and they never looked at the opportunity.

It is one of those rare things where you find a great company with a very focussed management team and the consensus is to stay away from it.

Those are the places where you have the potential to generate significant returns. For many years they have been growing at 50% year-on-year with ROEs north of 50% and yet people continue to ignore them.

It was trading at 10 times PE even a year ago. There was a tremendous value in there and eventually markets always recognise it, sometimes it takes a longer time. It takes more time for people to get comfortable with the story to fully comprehend it story but eventually they always do. Markets and people are very smart. They will always figure it out. It is just that in some cases it may take a little bit longer.

We always tend to focus on what is the next theme. Where do you think the buck is going to move and also what do you think is unlikely to change? You once said that the customer at the centre will never change and the customers’ appetite to buy something cheap or chase a product which is cheap will never change. Let us apply that theory to your portfolio. What do you think is unlikely to change in your existing portfolio for the next three or four years?

Two things never change – the propensity of people to spend money and to consume things. The only thing that changes is how much they buy and what they buy.

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