Time for Capsules

I had seen the capsule brothers long time ago, nearly 6 months ago as i remember, but at that time i found better opportunities and hence decided against putting the money in these companies. I call these companies as brothers because both have exactly the same capacity, but one is a case of pathetic capital allocation while the other is a case of good capital allocation. Both the companies have a total capacity to manufacture 3.5Bn capsules a year, i guess this should be the critical mass required to set up a manufacturing unit as it is really difficult to find exact capacity among competitors. I will present a small comparison of the two brothers below.

1. The companies have starkingly different RoE, Medi-caps has an effective RoE of 6-7% while Natural capsules has an RoE of 18%. Thats a huge difference!! And as it turns out, the difference is partly about operational efficiency but majority cane be attributed to capital allocation. Medi-caps has Rs.44cr of its assets invested in mutual funds out of a total asset base of Rs.57cr and the best part is the market value of these investments is only Rs.27cr but the company refuses to mark it to market as it believes the fall is temporary in nature and hence is carrying it at cost price. Which essentially means the company is never going to give this money back to the shareholders and is going to put the free cash it generates in more such stupid mindless capital allocation activities.
2. The EBITDA margins of the companies have a difference of nearly 6ppt. Natural capsules reports an EBITDA of 27% while medi-caps has that number at 23%. A further look at the number reveals that both the companies in 2010, earned a gross margin of 4443 and 4487 per lac of capsules sold respectively. So no major difference here, the difference stems from the fact that the employees in medi-caps are paid much more higher than those in natural capsules. For every lac capsules sold, medi-caps pays Rs. 897 while natural capsules pays only Rs.567.
3. Similar is the case with power and fuel expenses, natural caps uses only Rs.537/Lac capsules while medi-caps uses Rs.639/Lac Capsules.
4. On an asset turnover comparison, both the companies generate 1.2 times the gross fixed assets, but the story changes at the net fixed asset level where in Medi-caps due to its 70% depreciated assets is able to show a higher net fixed asset turnover as compared to natural capsules. On the working capital front, Natural capsules scores a strong upper hand than medicaps, the company has been able to bring down its net working capital cycle to a negative region while for medi-caps it stands at nearly 40 days.
5. The best is the fact that Medicaps has shown a 6% CAGR over Fy08-10 in revenues and (-12%) CAGR over the same period in profits while Natural capsules has shown a revenue and a profit CAGR of 20% over the same time period.
6. One more sweetener to the entire thing is the fact that Natural capsules is planning to double its capacity over this financial year to 7.35Bn capsules while medi-caps still decides to put its money in mutual funds.
7. Both the companies are almost debt free with natural capsules having a leverage of 1.2 while medi-caps being completely debt free.

I believe in comparison to medicaps, natural capsules is a far far better company and is still cheap despite its recent run-up today of nearly 17-18%.

AlphaGeo

This one is the most wierd result, that I have seen till now, I have seen profits doubling, quadrupling, margins expanding, revenues falling but revenues falling to zero is truly amazing, how can a company not have any revenues in a quarter i.e. 90 days. Well the company i am talking about Alphageo, just reported some crazy numbers, they reported zero sales and hence a total loss of -5.4cr. The company is into collection of seismic data for exploration and drilling purposes. The comapny during January 11, 2008 was quoting at a price of 901 and PE multiple of 50!!! and P/B of 12!! and as it stands today the company is at a PE of ~11. I really would want to see how the market reacts to the zero revenue. As of today the price was up 2% and the stock was quoting at 202.