Low Priced Stocks : Natural Capsules (NCL)

with the valuations of the front-runners getting steeper day by day, it makes sense to look out for fundamentally strong scrips that are still available at low valuations. Keeping this thought in mind, we at DSIJ have short-listed Natural Capsules for our recommendation in this column. There are certain companies which maintain a low profile and continue to grow almost unnoticed over the years. Thus, despite their performances these scrips fail to catch the investors’ fancy, when they actually could be a good pick for the portfolio. Almost an unheard name, Natural Capsules (NCL) is a similar story.

Based out of Bangalore, the company is basically into the manufacturing and marketing of gelatin capsule shells, which contributes 91 per cent to its total revenues, while the balance 9 per cent comes from contract manufacturing. The management, however, claims that contract manufacturing isn’t a major focus area for the company. NCL’s manufacturing facilities are based in Bangalore and Puducherry and it boasts of clientele such as Cipla, Aurobindo Pharma, Flamingo Pharmaceuticals, Kopran, Milan Labs etc. These top five clients contribute 35-40 per cent to its total revenues.

Primarily, what makes NCL attractive is its consistent performance. NCL has been growing at a five-year CAGR of over 20 per cent in the topline and 15 per cent the bottomline. Despite a tough last fiscal wherein companies across the board saw their revenues and profits shrinking; NCL has managed not only to grow in both topline and profits, but also has expanded its operating margins by 107 basis points. In fact, it has continued with this performance in the first half of this fiscal and has seen a further margin expansion of 104 basis points.

However, NCL wants to grow more briskly and has undertaken a capacity expansion plan wherein it would see its manufacturing capability grow by more than double to 7.35 billion capsules by June 2010 from its current limit of 3.62 billion capsules. The total cost of this expansion is about Rs 15 crore and is being funded a combination of debt and equity. NCL has already imported three capsule manufacturing machines, one of which is already commissioned, while the other two would be fully operational by June 2010. Once this happens it will push NCLs revenues to another trajectory altogether. The management is targeting revenues Rs 45 crore by FY11. That apart, NCL has also been paying dividend since the five years. In FY09 its dividend of 12 per cent worked out a dividend yield of almost 3 per cent. This limits any downside risk for the scrip. NCL has continued with its good work and managed to put up a decent performance in the first half as well wherein its topline increased by 10 per cent to Rs 14.17 crore (Rs 12.89 crore), while the bottomlirie increased by 43.42 per cent to Rs 2.51 crore (Rs 1.75 crore) account of better cost management.

For FY10 we expect NCL could post revenues of Rs 29 crore, while profits could around Rs 5.07 crore. At these estimates, NCL gives an EPS of Rs 11.26, thereby resulting in an estimated PE of just 3.7x. This is certainly worth a grab. In fact, on EVIEBDITA basis as well the scrip is available at 3x, which is quite attractive. Besides, at its two-week average quantity of 23,526, the volumes are quite healthy the scrip. Hence, it makes sense to buy Natural Capsules at its CMP of Rs 42.75, with a one year target price of Rs 55.