A Tale of Two Zoom Calls and One Stock Recommendation

The last few days have been all about pharma stock for me and my team.

The thing is, we had been trying to get management meetings (zoom calls rather) for a bunch of companies.

And two companies agreed to do them around the same time.

Both were from the pharma sector. Both were microcaps, a universe that we consider for our exclusive recommendation service - Phase One Alert.

We were glad it turned out to be so, given the environment around us.

What seemed to be a second wave of Covid is turning out to be a tsunami.

And defensive sectors like pharma are in the limelight again.

In the first wave, when the entire economy went into a lockdown, my team and I focused on companies where we could see the continuity in business irrespective of how long the pandemic continued.

We focused on 'Essential Stocks' and defensives, most of which have turned out to be good investments for subscribers.

Now that Covid cases are surging again and most states are either considering or have already imposed lockdowns, what could be a better sector to focus on than pharma, right?

Well, here's the thing.

The margin of safety in valuations that existed around a year ago in solid businesses, including in the pharma sector, has shrunk.

In fact, I believe a lot of fundamentally strong stocks seem priced to perfection.

The BSE Healthcare index is up 111% since the big Covid correction in March 2020, as compared to 84% gains in the BSE Sensex. The Sensex itself is trading at an all-time high P/E in the last two decades.

We were happy to come across two companies that belonged to the pharma sector, at valuations that are not expensive, if not dirt cheap.

These are the similarities.

Both are small, claim to be global market leaders in their respective niches, have reported good performances quarter after quarter, have comfortable debt to equity ratios, and very strong return ratios.

And both talk about new products and strong R&D as their forte.

But the differences became all too evident after the management meetings and digging deeper into their financials.

For all its claims, one of these allocates a miniscule amount to the R&D and makes no mention of the exact amount in its reports. Yet, the management claims it's a big differentiator.

It pays no dividend.

And it turns out that the vehicle support that it's providing it senior management and key management personnels are being counted under its gross fixed assets.

Wait, did I tell you that their investment in vehicles is 72% of their overall investment in buildings and 2 to 3 times of investment in land..and a fair chunk of debt goes towards vehicle loans.

It makes one wonder whether the company belongs to Pharma or logistics sector.

These were big turn offs. We rejected it.

However, the other company is different, and seems to be promising.

It's a global market leader in a niche API. Some very well-known names in the Indian and global pharma industry are on its client list.

The allocation to R&D is substantial. Its R&D expertise and promoters' competence is evident from the new products the company has developed inhouse.

And that the company has received USFDA approval for its products too.

Some of these products are at the forefront and much in demand in dealing with Covid symptoms. The contribution from new products is likely to go up from 8% to 20% in a year.

Since the last two years, it has started paying dividends. With upcoming incremental capacities, new products in the basket, and rising exports, this company is all set to take the next big leap in our view.

Insiders have been consistently buying the stock. We believe big investors will soon follow.

Phase One Alert subscribers can read the recommendation report here.

Bottomline: While the big picture is important, betting blindly on narratives, momentum, and even on numbers, could turn out to be a bad decision.

Investing is hard. Even with best of processes, some investments will not turn out as expected.

But with the right process in place, you could swing the odds of success in your favour by a significant degree.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure