Cupid Ltd

Cupid Ltd is a small but fast growing company in high-growth

®
global prophylactics / contraceptive market. We believe its erratic
Independent Equity Research performance is a thing of the past and the company has
restructured itself well for a stable and growing performance.
26 Nov 2014 Rising comparative advantage of India over global competitors
For Private Circulation Only (China, Thailand, and Malaysia) is a tailwind for it.
Important disclosure on the last page

Fair Value (1-year out) Rs.111 Current Price Rs.46 Potential 2.4x

At current price, stock trades at 7.9x FY16E EPS and 5.2x FY17E EPS with expected earnings growth of
~48% in FY16-FY17. Our fair value of Rs.111 is 10.7x FY17E EPS. RoE is expected to expand from
22% in FY15E to 29% in FY17E. The company has zero net debt and will remain so.

Key Data Key Investment Points

Market Cap Rs.55cr
US$9mn
China, Thailand, Malaysia and India are major condom manufacturers
Shares and exporters to the world. With labour costs rising sharply in
Outstanding 1.11cr Malaysia (contract labour cost up 80% in the last one year), Malaysia
52 wk Hi-Lo 50 – 7 is being priced out, leaving China & Thailand as major competitors for
Avg Trading Vol No. of shares
India in global market. Chinese labour costs have also been rising at
1 month 108,000 18-20% for the last two years.
3 months 105,000
Cupid Ltd, earlier dependent majorly on India’s Ministry of Health
1 year 33,000 (MoH) orders, has found a good foothold in Europe & Africa. With this
BSE Scrip Code 530843 we expect its erratic performance to give way to relatively stable and
BSE Group B
growing performance.
Shareholding% 30SEP14
It’s currently operating at 37% capacity utilisation in male condom
*Promoters 48.81 (MC) and 67% in female condom (FC). FC capacity doubled recently.
*South Korean No major capex required till it reaches 2.5x the current sales volume.
collaborator 2.70
*Others 48.46

High margin FC sales are rising rapidly leading to improved profits.
Valuation FY15E
Cupid recently signed a 10-year supply agreement with a US
EV/ EBITDA 5.1x enterprise, which will distribute Cupid’s brand Green Love in the US.
Market 1.4x This could be a game changer for Cupid. Cupid’s plant is USFDA
Cap/Sales
compliant.
P/E 8.6x

Cupid is among a handful of companies globally to make FC. Cupid is
Products among the only two companies approved by WHO/UNFPA for
Prophylactics/contraceptives: worldwide bulk procurement of FC and only company so approved
Male & Female condoms. globally for both FC & MC.
-Exports 80%
-Contract manufacturing 15% Watch out for
-Branded sales 5%
Sharp rise in INR appreciation not accompanied by similar appreciation
in Baht and Yuan. Sharp rise in Indian labour cost not accompanied by
similar rise in Thailand and china

Latex consumption per piece of condom is rising due to product mix
change and rising wastage & rejections.

Impetus Advisors | Independent Equity Research

Equity Research | Cupid Ltd | 28 Oct 14

Introduction
Cupid Ltd (formerly Cupid Condom Ltd), is a Rs.32crore Revenue company. It makes male and female
condom at its plant at Nashik, Maharashtra, India.

Cupid was originally promoted by Amit & Shiv Agrawal. They are no longer with the company.
Originally promoted as a 100% EOU, it was later converted into a domestic unit due to lack of export
orders then. India’s Ministry of Health (MoH) has been its biggest customer for many years. The
company saw worst of times during 2008-2009. Mr Omprakash Garg, current CMD, then took charge
and has been developing export market for the company.

Condoms cater to needs of Family planning and Birth control (contraceptive) and disease prevention
(prophylactic). A condom is a barrier method commonly used during sexual intercourse that reduces
the chances of pregnancy and the spread of STDs and AIDS. Condoms are also widely recommended in
the prevention of STIs.

In Birth Control, condoms compete with contraceptive drugs and devices, which are temporary birth
control methods and function majorly by altering the mechanism of ovulation and acting as physical
barriers between the sperm and ovary.

Condoms are the only prevention products available against sexually transmitted infections (STIs:
HIV/Aids). No near-term alternative prevention products on the horizon.

Cupid currently has four sales channels:

• Ministry of Health – Government of India (no orders in FY14 & FY15 so far but expected in Q4FY15)
• Exports to multiple clients (ground work for developing export market started in 2009-2010) –
(80% of sales currently).
• Contract manufacturing [customers include Cipla, Chokhani Pharma, DKT (an international NGO
working in India)] (~15% of sales currently)
• Own brands for Indian market (5% of sales currently)

Exports carry high margin, other channels at present have low margins. With DPCO’s price cap on retailing of
condoms in India, the margins have contracted. Mankind Pharma, the biggest branded player (Brand: Manforce) has
shut down its plant.

Brazil is the largest buyer of condoms from India followed by United States and South Africa. Small quantity of
condoms is imported into India from Malaysia, South Korea and Thailand.

Impetus Advisors | Independent Equity Research

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Equity Research | Cupid Ltd | 28 Oct 14

Key Investment Point

Global condom market is growing at 8% annually

The global condom market has been growing at 8% annually driven by efforts of governments and
NGOs globally to put across safety and birth control messages. Global market size at present is 17bn
pieces and Indian market size is 2.4bn pieces. It’s a huge and growing market and Cupid’s current
capacity is just 2.5% of the global market size. We expect Cupid’s sales to grow at minimum 15%
annually. Cupid is expecting large order inflows from Keyna, Uganda, Myanmar, South Africa, Brazil,
and Indonesia. MoH orders may also come in towards the end of FY15.

One of the few companies in the world to have developed female condom (FC)
Cupid and Female Health Company (FHC)-Chicago (Plant: Malaysia) are the only companies in the
world to have developed FC and gotten pre-qualification from WHO/UNFPA. Its uniquely designed FC
have been approved by WHO/UNFPO for their worldwide bulk procurement programs. FC is an
oligopolistic market with only a handful of players - Reckitt Benckiser, Origami Healthcare, Silk Parasol,
Sanghai Dahua, HLL Lifecare Ltd and Tianjin Condom Bao.

Cupid has been spending and working on R&D in this field since 2008. It has an approved R&D Centre
for this. It also developed a unique shaped specialty male condom (SMC-1) and has received worldwide
patent on this.

FC has been in existence for many years but is likely reaching tipping point now with awareness
creation by FHC. FC market has been growing exponentially lately. FHC (through its distributor
Semina) last month won an order to supply 50mn FC to Brazil. This is the largest single order (previous
Brazil order size: 20mn) for FC and indicates the high growth potential in FC. Cupid had also bid for
this order through its distributor in Brazil and reportedly was L1 but yet the order went to FHC.

The worldwide need for FC far exceeds the current utilization of the product. HIV/AIDS continues to be
the leading cause of death globally for women in the 15-44 year age group.

Western world condom manufacturing is being closed down

Condom manufacturing plants in the western world are being closed down due to high labour costs
there. As a result, the opportunity for countries like China, India, Thailand and Malaysia has been
growing.

Impetus Advisors | Independent Equity Research

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Equity Research | Cupid Ltd | 28 Oct 14

India’s rising competitive advantage due to rapidly rising labor costs in competing
countries
Rapidly rising labour costs in Malaysia & china is making India more competitive in global markets.
Malaysia has been almost priced out with 80% rise in casual labour cost in the last one year.

Long term supply contracts

Cupid has long term supply contract from WHO/UNFPO. The current 3-year contract is valid till March-
2016. Cupid is a pre-qualified supplier and expects regular renewal of contract.

It recently entered into a 10-year supply agreement with a newly formed enterprise in the US –
Safeware & co. This company is promoted by three individuals; one of them has been in the business
of pharmaceutical distribution in the US. It intends to distribute cupid’s condoms under Cupid’s Green
Love brand in the US. If Safeware & co is able to establish the brand there, it would open up many
opportunities to Cupid to leverage its brand.

Cupid’s FC capacity recently doubled, FC has very high profit margin

Cupid’s 12mn pieces FC capacity has been recently expanded to 25mn pieces in expectation of strong
demand growth and large orders. In the half year ended Sep-2014, it made only 4mn FC (67%
capacity utilisation). As FC production ramps up with inflow of orders, profit margins will significantly
improve as FC carries significantly high margin than that in MC. FC realisation is 17-18x higher than
that of Mc but FC cost is only 2-3x higher than that of MC. MC market is competitive and offers low
margin. However, Cupid does not currently have FC orders beyond Dec14. High capacity utilisation
may not happen soon.

Enough slack in the capacity to grow 2.5 fold

Cupid’s current annual production capacity is 375mn pieces of MC and 25mn pieces of FC. In the 1st
half of FY15, it doubled its sales and yet is operating at only 37% capacity utilisation in Mc and at 32%
utilisation in FC on expanded capacity. It will not require any capex till its sales volume grows 2.5 fold.
In any case, it’s not a capital intensive business.

High margin South African tenders

South Africa is a large market and offers high margins. Cupid has been successful in bagging a
lucrative tender from South African government. This order is currently being executed and is expected
to be over by Dec-14. This order is the main reason for significantly improved performance of Cupid
since QE Mar-14. It’s now working on a large 3-year FC supply order from South Africa. If Cupid gets
this order, it will be a significant win and supplies are likely to commence from April-15. If Cupid does
not get any other FC order in the meanwhile, QE Mar-15 performance may show de-growth in profits.

Impetus Advisors | Independent Equity Research

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Equity Research | Cupid Ltd | 28 Oct 14

Foray into new products

Cupid is contemplating foray into new but related products (e.g. Lubricants), which are already being
demanded by its current customers. It has already got license for this from Maharashtra FDA.

Quality products – Cupid only company with WHO pre-qualification for both MC & FC
Cupid is one of the only two companies pre-qualified with WHO/UNFPA for FC and contract
manufactures for Cipla and DKT. This indicates that Cupid’s products are quality products. Even for MC,
there are currently only 25 WHO/UNFPA pre-qualified plants belonging to 20 companies worldwide.
Cupid is the only company worldwide to have pre-qualification from WHO to supply both MC and FC.

Risks/Concerns:

Forex and labor cost

As the key input is a global commodity and input price is largely a pass through for Cupid, its global
competitiveness hinges on comparative exchange rate and labour costs vis-à-vis China and Thailand,
the two main competing countries.

Top management continuity

Currently only one member from the promoter family (CMD Mr Omprakash Garg – OPG)) is part of the
management. Other promoter family members are engaged in other businesses and professions. OPG
is 71 and has partial visual impairment. However, the company has long serving employees (12 since
1998 and two since 2008).

Rising consumption of latex

Latex rubber is the main input to both MC and FC made by Cupid. FHC uses Nitrile polymer to make
FC. Latex consumption per piece of MC and FC has risen by 20% in FY14. Part of this is due to change
in production mix with higher proportion of longer & thicker pieces and part due to rising wastage and
rejection during latex handling and production process.

Volatility in quarterly earnings

Bulk of Cupid’s sales is dependent on tender wins and issue of purchase orders by UNFPA under long
term supply contract. Timing and quantity of these are not fixed and therefore causes volatility in
quarterly revenues. As FC has significantly high profits margins than that in MC, the product mix
causes volatility in quarterly margins and profits. Based on current order book, QE Mar-15 profits are
likely to de-grow, as currently there are no orders for FC for that quarter. MoH MC Order may come in
that quarter but margins will be lower.

Impetus Advisors | Independent Equity Research

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Equity Research | Cupid Ltd | 28 Oct 14

Significant quarter-to-quarter variations in the Company's results are likely due to the timing and
shipment of large orders rather than from any fundamental changes in the business or the underlying
demand for condoms.

Management & Ownership

Promoters (Garg family) owned 48.8% in Cupid as on 30SEP14. 18.5% of the promoters’ holding is
pledged with ING Vysya Bank. While the loan, for which the pledge was made, has been repaid, the
bank has retained the pledge for CC limits that the company has. There is negligible institutional
holding. Mr Omprakash Garg (71) is chairman and managing director. An Engineer and a US Citizen,
he has real estate business in the US. He has been spending two thirds of his time in India for last few
years to bring the company back on track. He has been part of an organisation that provides inputs on
process formulation for contraceptives for many years. The promoter family is also into jewellery
business in India.

Valuation
At current price, Cupid trades at 7.6x and 5x FY16 and FY17 estimated earnings. Cupid’s FY15E EV is
6.1x EBITDA. In 2010, Reckitt Benckiser acquired SSL International at 18x EBITDA. SSL had lower
growth prospects and global market valuations were significantly lower than what they are today. At
our fair value, Cupid’s Enterprise Value works out to 12.3x FY15 EBITDA.

Impetus Advisors | Independent Equity Research

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Equity Research | Cupid Ltd | 28 Oct 14

Financials
Income Statement Multiple Valuation
Rs. Cr. FY14 FY15E FY16E FY14 FY15E FY16E
Net Revenues 19.6 34.4 44.8 EV/EBITDA x 26.9 6.3 4.8
EBIT 0.61 7.5 10.3 Mkt. Cap/Sales x 2.7 1.5 1.2
PBT 0.11 6.9 10.1 P/E x 540.0 11.4 7.9
PAT-Adj. 0.10 4.6 6.6 Price/Book x 2.8 2.3 1.8
EPS Rupees 0.09 4.12 5.98

Free Cash Flow

Ratios
Rs. Cr. FY14 FY15E FY16E
% FY14 FY15E FY16E
NOPLAT 0.3 5.0 6.8
Revenue Gr% -31.3 75.6 30.3
Change in Net Working 1.6 5.3 2.6
EPS Growth % -86.1 4639.6 44.9
Capital
RoE % 0.5 21.9 25.1
Operating Cash -1.3 -0.3 4.2
Net D/E x 0.17 0.17 -
Flows
Debtors Days 59 59 59
Net Capex & others -0.7 - -
Creditors Days 81 55 55
Customer 8 9 9 Free Cash Flow -0.6 -0.3 4.2
advance Non-opr. Cash flow -0.1 - -
RM Days 24 24 24 Cash Flow to Investors -0.6 -0.3 4.2
FG Days 76 60 45
WIP Days 3 2 2
Financing Cash Flow
Rs. Cr. FY14 FY15E FY16E
Balance Sheets Post-tax Interest 0.2 0.3 0.2
Rs. Cr. 31Mar14 31Mar15 31Mar16 Repayment/ (issue) of -0.7 -0.6 3.8
Assets Debt
Net Block 16.3 16.6 16.6 Minority Interest - - -
CWIP 0.3 - - Pref Sh Redemption - - -
Net Curr. Assets 6.3 11.5 14.0 Equity Share Dividend - - -
Investments 0.1 - - Equity Buyback/(issue) - - -
Cash equivalent 0.3 0.4 0.5 Inc / (Dec) in surplus -0.1 -0.1 -
cash/Investments
Liabilities Financing Cash Flow -0.6 -0.3 4.2
Equity Capital 11.1 11.1 11.1
Reserves 7.5 12.1 18.7 DCF Valuation
Debt 3.2 3.8 -
Key Assumptions %

Interim Performance Terminal Growth Rate 3.0

Rs.Cr. Dec13 Mar14 Jun14 Sep14 WACC 14.9
Months 3 3 3 3 Cost of Equity 15.1
Revenues 3.6 8.4 9.7 10.0 Terminal ROIC 17.9
EBITDA 0.2 2.6 2.5 2.9
EBIT -0.2 2.3 2.0 2.4 Outcome
PBT -0.3 2.1 1.9 2.4 Fair Value Per Share (Rs.) 96
PAT-Adjusted -0.3 2.1 1.9 1.7 FV-1 year out (Rs./share) 111
Eq Capital 11.1 11.1 11.1 11.1
EPS Rs. -0.28 1.87 1.70 1.54
EBIDTA Margin 5.5 31.5 25.9 28.4
%
Other -3.2 - - 3.3
income/PBT %
Tax/PBT % - 3.3 - 29.3
RM/Sales% 56 44 45 45

Impetus Advisors | Independent Equity Research

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Equity Research | Cupid Ltd | 28 Oct 14

Important Disclosure
This material has been prepared by Impetus Advisors, Mumbai, India. Owners, analysts, and/or employees of
Impetus Advisors hold long position in the stock mentioned in this report.

The views expressed herein correctly reflect Impetus Advisors’ views. Owners, analysts, and/or employees of
Impetus Advisors hold long position in the stock mentioned in this report.

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About Impetus Advisors

Impetus Advisors, based at Mumbai, is an independent equity research firm, which specializes in identifying deep-
value stock ideas among Indian equities. It provides equity research to high net-worth, proprietary, and
institutional investors.

Besides its own stock picks, Impetus Advisors also provides customized equity research outsourcing services to
stock brokers, investment bankers, and investors. As an independent research outfit, it is into neither broking nor
investment banking nor any other activity that can potentially conflict with objectivity of its research.

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Impetus Advisors | Independent Equity Research

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