One of my most memorable — and profitable — investments in the past decade is a leading Indian pharmaceutical manufacturer of generic drugs, Cadila Healthcare. Being a contrarian value investor, scouting for good investment betsduring an euphoric 2007 was a daunting task. While most sectors, in tandem with the boom period, were scaling new heights (infrastructure being a favourite), the pharmaceutical and the IT sector seemed relatively unattractive to a majority of investors. For instance, during those days, the market capitalisation of India’s largest real estate playerwas greater than the market cap of the entire healthcare sector put together.
Against this backdrop we took a call to invest in Cadila. The stock was an underperformer in 2007 given the general disinterest in the pharma sector and more importantly the company was manufacturing a product that faced a threat of premature generic launches. The company’s joint venture manufactured the key starting material (KSM) for a patented product, Pantoprazole, which accounted for approximately 20% of the company’s profit. As a result, there were concerns surrounding the outlook for the stock. Rupee appreciation was also another factor which majorly impacted the company. Barring these two factors, the company was sound. It was the fourth largest pharmaceutical company in India, in terms of revenue, with approximately 3.5% market share.
In March 2007, we bought the stock [which was trading between Rs.300 and Rs.320 (adjusted price was Rs.42-43)]. But as expected, the company’s profit growth slumped 9% in FY08 compared with 58% growth the previous year.
What gave investors confidence to stick was the management’s constant reassurance that they were working towards offsetting this problem by new product launches. However, there was no fixed time-frame for the resolution.
Over time, the firm entered into a joint venture and leveraged its capabilities to develop high-end products which have steeper margins and, thereby, expand its active pharmaceutical ingredients (API) pi