Cupid Ltd – Innovating its way to turnaround, Success and Beyond

Innovation is one of the best weapon to change a company’s fortunes. You take a problem and solve it, uniquely, and you are done. One such pharma company is male and female condom manufacturer Cupid Ltd. that has relied on Innovation to come out of woods. Cupid, is a condom manufacturer and the only Female condom manufacturer in India with its unique design approved by UNFPA/WHO and FDA. Cupid is only the second company in the world whose female condom has been approved by WHO & UNFPA. Being the sole manufacturer (which it manufactures from its UNFPA / WHO approved sinnar factory) in india and second only in the world, the market opportunity is very big, especially from WHO which is reflected in the various orders the company has started receiving in last few months. What is exciting about this company is that it is continuously innovating its product line. Although it has been manufacturing male condoms for a long time, but, keeping its promise with innovation they have been tinkering that product and trying to improve on it. Their R&D efforts in this regards bore fruits and last year they were granted a patent for their uniquely shaped specialty male condom. Cupid offers various types of condoms such as Plain, Dotted, Multitextured, as well as its newly developed female condoms. Some of its brand names are Green-Love, Big-Dom, Hi-life,and Black Cobra.

Past Imperfect, Future perfect: The Company had been struggling with lumpy earnings profile. The reason was the R&D resources being put on these innovations and more importantly their over-reliance on Govt. of India for orders. With their Female Condoms getting WHO approval Cupid entered into a Long Term Agreement to supply Male and Female condoms to the UN Population Fund (UNFPA).
The Quantity and value of each consignment will vary from time to time as per UNFPA’s global procurement requirements. The orders have started flowing from different countries across the world like Africa, Denmark etc. Cupid also markets its products in Russia, Australia, Turkey, Nigeria, Jamaica, UK, and Italy. The margins on these orders are very good too (though a number cannot be put across as the margins are also dictated by the kind of packaging associated with the orders). Last year the company was expecting an order from Govt. of india (that did not materialize), which is expected to fructify in this year. This would also help in further topline growth. Cupid Female condoms have been approved by WHO-UNFPA in 2012 and by South African Bureau of standard (SABS) in July, 2013. Currently Cupid is selling this condom in Indonesia, Brazil, Mozambique, Ivory Coast, Netherland, South Africa and India. Cupid’s customers apart from WHO and Govt. of India include Cipla and DKT. Cupid is anticipating large volume orders from South Africa, Brazil , NACO (National Aids Control organization) and Ministry of Health, New Delhi during financial year 2014-2015. The Company’s products are well recognized in the market and are best in terms of quality and standards.

               Earlier, the company used to have debt of more than 7cr in 2009-10 and debt to equity of more than 1 but the company is now debt-free. The promoters have also increased their stake from 36.9% to 48.81% (and the pledge has reduced from 41% to 18%). As per my interaction with the company’s management (Most of the research presented here is the result of my interaction with the management), starting this FY, the company’s earning profile will improve significantly (With no capex planned for next two years) and most importantly would become more stable and predictable. As this happens company plans to start paying dividends too. Management was saying that earlier all their internal accruals were being used to repay debts and invest in R&D (and therefore, no dividends – even Chairman did not accept salary, good capital allocation). Now as they start reaping the benefits of it, the company would start rewarding shareholders too (the management acknowledged that whatever is good for minority shareholders is automatically good for the promoters – being the largest shareholders). As per the company’s management, this year the company will “easily” surpass its all time high turnover. More importantly the bottom-line would be great, thanks to its WHO orders. The Nov last year’s contract would be up for renewal in Oct and the value of that would be keenly watched (they expect it to be better than previous order). The management is noticing strongest ever order inflow in the history of the company. As per my estimates (based on my interaction with company), the company could easily report an EPS of around 6rs-7rs for this FY.

Superb Valuations for Investment: While Other pharma companies are normally trading at around 22-35 PE with huge debts in their books but with Cupid, on the other hand, at the current price of 21rs, we have a debt-free pharma company trading at a trailing PE of just 8 (and a forward PE of just 3) backed by ethical management (so rare in small caps) in a huge addressable market with hardly any competition. Also considering the estimated EPS of 6rs (on a lower side), the stock price can go up multi-fold. Another important point to note is that the Chairman has chosen not taken any salary for last few years , owing to not so great performance in last few years. This is tremendous and so rare (there are companies with Debt to equity of 3 and 4 and their promoters take crores in compensation). Also, an interesting point is that company does not have any contingent liability – refreshing to see such an attribute associated with a company that manufactures goods.

Technicals: The stock broke out after more than 6 yrs of consolidation. This bodes very well for the Cupid investors. Such stocks don’t just double and stop, they go much higher.

Company’s website: http://www.cupidltd.com/

Note: Addressing a general concern highlighted till now:The stock price is already way higher than the average price of pledge creation.Being a debt free company one should be least bothered about this pledge. Historically also, the pledge has never been sold, even when the debt to equity was more than one. Moreover, the pledge has only reduced over the years. Lets also not forget the chairman has not accepted any remuneration for last few years. Do not let micro-picture dictate the macro-picture. IMHO This kind of management is hard to find by in small caps.