Valuation in Motion: Cupid Limited Valuation: David Vs. Goliath

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Cupid Island

One of the more interesting campaigns was done by Cupid Limited recently. In July 2020, Cupid inaugurated ‘Cupid Island’ at City Center Mall Square in Nashik. It has a statue of a couple with Umbrella in rain surrounded by a beautiful garden and a statue of Cupid (The Roman God of Love). This island also has a population clock which shows the current population of India. It also shows the current date, time and the current temperature.

You can find similar campaign material from Cupid by simple Google searches. You can also follow the News & Articles page on Cupid’s website for regular updates.

Note: Debt

You may notice that the company has a Liquid Cash balance of close to Rs. 60 Crores. But in the recent quarters, they have taken up a Bank Loan of Rs. 31 Crores. What is the need for this?

Cupid very recently supplied to the Brazilian government for the first time. The African government, which is their regular client, has been quick in terms of payments. But it looks like the Brazilian government has demanded a 90-day period for paying for a consignment worth Rs. 31 Crores. So naturally, a Receivables of Rs. 31 Crores has been created.

Instead of taking it on their existing Book (Using up the Liquid Cash), the management decided to take a loan to act as the Working Capital for this consignment. So, they took out a Bank loan against their Fixed Deposit for a similar amount. In the company’s history, Bad Debts have not been very prominent (Ironically, a couple of Bad Debts, although very small in amount, have been written off due to mix up with the Government of India):

Rest assured, Mr. Garg has promised that the loan will be repaid once the Receivables situation is resolved.

Unfortunately, there is no concall scheduled to discuss the Q4 results (Because of COVID19). So, there is no status update on this specific Receivables item. We can still see the loan existing on the company’s books, however.

Note: Risk-free Rate

I entered the Risk-free Rate based on Government of India’s 10-year Bond Yield as seen below:

Note: Beta and Indexed Returns

Also, I tried calculating the Beta and Indexed Returns (NIFTY 50 Returns) using data from Yahoo! Finance.

But it looks like NIFTY 50 Returns even since the last 10 years is too low (~6%). This would put Cupid’s Cost of Capital at roughly ~7%, which is obviously too low. I will be using a workaround for this, which I will explain later in this post.

Cupid does not have any R&D or Stock Options/Warrants. It does have a lease obligation of Rs. 17 Crores, which I have included.

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The following are the assumptions I am going to make for my Valuation of Cupid Limited:

Note: Sales Growth

This may get a little confusing, so I request you to pay close attention.

There are two parts to this assumption:

1. COVID19 Impact (Only for 2021): Most of Cupid’s Revenues comes from Donor Funding and WHO. Since both of these would have been re-routed to fight COVID19, I expect a washout 2021. I have assumed that Cupid will be able to run only at a Capacity Utilization level of 50%, as opposed o the current, full level of utilization.

2. Post COVID19 (2021-2030): Post COVID19, I expect the Global B2G (Public) Condoms business to grow at its regular rate of 15% on average. However, I expect an important catalyst in Cupid entering the U.S. Female Condoms Prescriptions market, where FC2 is the sole competitor now. I expect them to take up 50% of the market over a decade (Which is a very conservative assumption, because Cupid has the cost advantage – producing from India and selling in the U.S.)

I used Excel Solver to arrive at the growth rates to match these assumptions. The growth rate looks very high because it is on a smaller base of ~Rs. 80 Crores, not on the current base of ~Rs. 160 Crores. If you actually work it out from the current base, the CAGR over 10 year turns out to be ~16% or so, which seems like a reasonable assumption to me. This is way below the Sustainable Growth Rate of Cupid, which is up there at 21% or so. Hence, we are good.

Note: Operating Margins

This is just an extension of my assumptions for Sales Growth above.

When Cupid captures the U.S. Prescription market, the Product Mix will turn favorable towards Female Condoms, which will increase the blended Margins of the company eventually.

During the Terminal period, I have assumed that the Margins will reduce to 75% of the peak Margins. I know this isn’t exactly logical – but we have only 2 players in this market and both of them are in early stages of growth. We don’t have any references for what a matured Margin profile looks like.

Note: Tax Rate

Corporate Tax Rate in India has been cut to 25%. 

Note: Capital Turnover

This is not a capital intensive business. So I have more or less used long term average as my pivot.

Note: Reinvestment Rate

Since I manually adjusted the Sales for the first year alone, I adjusted the Reinvestment amount to also match a ‘regular’ level of Reinvestment. The rest of it is calculate automatically by the model.

Note: Return on Capital

Return on Capital will converge towards the Cost of Capital over the long term (Actually in the Terminal Year, it goes below the Cost of Capital – which assures us that this valuation is conservative).

Note: Depreciation

Depreciation as a percentage of Sales will converge towards the long-term average of 3.94%.

Note: Opportunity Cost

I have used 15% as my Cost of Capital, which is the 99th Percentile Cost of Capital for Indian companies according to Prof. Aswath Damodaran’s Useful Data Sets. You will find this fairly reasonable when I explain the Risks in the company later on in this post.

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The Diagnostics section does not show any red flags (Logical errors in the assumptions).

According to my assumptions, this is how Cupid’s business will evolve over the long term:

Now we can look at the implied value of Cupid Limited based on these assumptions.

Moment of truth.

I think Cupid Limited is fairly valued at Rs. 220, which is more or less equivalent to the CMP of the company. So to me, it was not a surprise when the stock fell to Rs. 125 during the March crash and quickly recovered by ~66% to get to the CMP.

But that is not all. We still need to look at some of the Risks surrounding the company.

The Sensitivity of Value tool shows the different Valuations of the company based on differing assumptions of Growth and Cost of Capital during the Terminal period.

To put it shortly, you are more likely to make good returns if you purchase the stock between the Pessimistic Value and the Probable Value. You are less likely to make good returns as you move past the Probable Value and towards the Optimistic Value.

In this section, we will talk about the potential risks in the company. For some of them, we will also attempt to convert the risks into a number impacting the final Value.

Succession Risk

The biggest risk I see for Cupid Limited is the succession. Mr. Garg is getting old. The company has been searching for a new CEO for more than 3 years and there is still no suitable candidate. Mr. Garg is looking for someone with a Sales background, so they can help out the company with B2C prospects. Furthermore, it seems like some CEO candidates demanded an office in Mumbai. Mr. Garg felt it was unnecessary, when the plant is in Nashik. So the search for the CEO trudges on, which leads us to the next point.

Takeover Risk

I wouldn’t really call this a ‘Risk’. This is more of a possible endgame for the company. If there is no suitable CEO even when Mr. Garg is too old to work efficiently, there is a good possibility of a sell out to a larger player like Mankind or Skore. Mankind is even looking to enter the U.S. market themselves, so they may find Cupid a good fit. The actual ‘Risk’ is that existing shareholders either have to take whatever valuation the acquirer provides them (or) stay put with an unlisted company (After takeover).

Capital Misallocation

This is a legitimate Corporate Governance issue. In the past, the company has ‘invested’ in a couple of unrelated Real Estate companies and written off the entire amount later. The amounts themselves are small in nature and there hasn’t been a repeat in the recent few years. But I highly suggest you read the blog post written by Dr. Vijay Malik for better understanding.

Regulatory Risk

As mentioned above, WHO currently holds the power to cancel Cupid’s ‘license’ to produce Female Condoms. When they enter the U.S. prescription market, they will be liable for further scrutiny by the FDA. These regulators can make or break the fate of Cupid Limited. Although to be logical, Cupid has been a good supplier to many WHO-supported countries. Over the years, they have developed a good rapport. So, this Risk may not really come to pass. But it is good to keep an eye on it anyway.

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Competitive Risk

It is fairly difficult to get into this market (See ‘Entry Barriers’ section above). But any new dominant entrant into the market will eat away at the Margins of Cupid Limited.

I am going to ‘simulate’ some of the assumptions I have made above. I have tried to show exactly what I am trying to simulate in a tabular format:

So once I run a 1,000 simulations, this is the output I get:

In case you are not familiar with a Normal Curve, we can reinterpret this diagram is easier terms:

I personally like a Probability of Undervaluation of 90-95% for most companies. But that is because I am a conservative investor by nature. If you are different and have a varied Risk Aversion compared to me, you will have to pick a Probability of Undervaluation for yourself. This will define how much you are willing to pay to own Cupid Limited (If you are willing to own it at all).

In case my assumptions do no seem logical to you, feel free to download the model below and make your own changes. In fact, I encourage you to do the same. We can also have a conservative in the comments section below to discuss differing views.

Warning: I have manually edited the model for valuing Cupid. So if you are going to use this Excel sheet to value something else, it will not work properly. If you are looking to download just the model for your personal use, please go here. You can ideally delete everything within the yellow boxes and keep it as a template for future use.

I’ve hidden several sheets in the Cupid Valuation Excel to avoid clutter. Unhide them as you wish.

Cupid Limited coming up from being a small-timer to getting a WHO pre-qualification to going toe-to-toe with a U.S. Pharma company (Veru Inc – Parent of FC2) reminded me of the biblical fight between David and Goliath.

Will David (Cupid) successfully rise up to the challenge and defeat Goliath (Veru) in his home ground (U.S.)? Only time will tell.



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Dinesh Sairam
Dinesh: Investor | Risk Consultant | Finance Geek | Writer @Quora | Blogger | Poet | MBA from XIME
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