We at RH Perennial fund are back again spotlighting the fastest-growing company in the dental healthcare sector- Prevest Denpro. Prevest is one of India’s leading manufacturers of dental materials addressing a USD 20 billion global market growing at 8% CAGR with applications in endodontics, prosthodontics, orthodontics, restorative dentistry, aesthetic dentistry trusted by dental professionals across the world in more than 75 countries with the most enviable financials- 5-year revenue/PAT CAGR of 21% & 57%, gross profit margins >70%, negative cash conversion cycle & ROCE>40, debt-free status. But what caught our attention was the potential hyper scaling over the next 3-4 years.

 

The business pre- IPO had a gross block of INR 8 crores and a turnover of 27.5 cr.  It raised ~INR 26 crores from its IPO with INR 16 crores for the new CAPEX. Essentially if the management executes over the next 3-4 years, it could more than triple its revenues in an industry where the company buys the product for INR 3 and sells it for INR 10 (gross margins more than 70%). We see significant earnings as well as valuation rerating potential here.

Performance update of RH Perennial Fund

At Perennial Fund, our core focus is purely on wealth creation by focusing on identifying major wealth creation trends, monopolistic & fast-growing capital-efficient franchises with reinvestment runways run by able & minority friendly management sticking to our core philosophy of growth at a reasonable price. Our proprietary “fraud search” & “forensic accounting” framework helps us weed out poor quality businesses & promoters. While our qualitative judgment helps us identify the moats of perennial champions. The Perennial Fund went live in April 2021. The performance so far is shown below

 

 

 

 

 

 

 

Company background

Prevest Denpro was founded in the year 1999 by  2x entrepreneurs Mr. Atul Modi and Mrs. Namrata Modi, who cumulatively possess over 42 years of experience in the dental industry. They sell products through a network of 53 dealers spread over 16 states and 2 Union Territories in India and through 91 overseas agents spread over 75 countries. They primarily follow a business-to-business model for all their dental products. Further, they have started selling certain of their products to direct consumers on digital market platforms such as Amazon and their own web-platform i.e. prevestdirect.com.

 As of date, they have collaborated with five reputed dental universities and institutions of India for the exchange of technical knowledge and conducting training & research on dental materials. Also, they have entered into a license agreement with Sree Chitra Tirunal Institute for Medical Sciences & Technology, Kerala for obtaining the know-how and rights to enable them to manufacture bioactive bone augmentation materials.

Their products are certified with ISO 13485:2016, EU CE mark & US FDA,  which makes them eligible to market their products in European Union and many other countries which have adopted EU medical devices directives.

Financial performance

Over the past 5 years, the company has shown exponential growth in revenue & profitability with 5-year revenue/PAT CAGR of 21% & 57%, gross profit margins >70%, negative cash conversion cycle & ROCE>40, debt-free status.

Our proprietary fraud search and forensic accounting checks also did not show any major red flags as we discussed with the management the issues of low cash tax which was due to deduction under section 80-IB due to factory set up in Jammu & negligible receivables have turned bad.

Key success factors

• Potential capital efficient hyper scaling- The business pre- IPO had gross block of INR 8 crores and turnover of 27.5 cr.  It raised ~INR 26 crores from its IPO with INR 16 crores for new capex. Essentially if the management executes over the next 3-4 years, it could more than triple its revenues in an industry where the company buys the product for INR 3 and sells it for INR 10 (gross margins more than 70%). We see significant earnings as well as valuation rerating potential here.
• Huge size of opportunity & attractive industry structure- The business is addressing USD 19.3 billion global dental market growing at 8% CAGR & USD 700 million Indian market growing at 7% where most players display excellent unit economics & value creation over time. the healthcare sector fits the bill perfectly. We had emphasized our liking for healthcare sector in our earlier blog https://perennialfund.in/india-healthcare-the-breakout-decade/ and webinar https://youtu.be/lw4MIiv_yFk.
• Clean compliance record & entry into high growth markets- Theproducts are certified with ISO 13485:2016 and EU CE mark, which makes them eligible to market our products in European Union and many other countries which have adopted EU medical devices directives. They are also certified by Breakthrough Management Quality Registrar (BMQR) for Good Manufacturing Practices for the manufacture and sale of dental materials. The Company is all set to mark footprints in the markets of USA and Canada. The Company has obtained USFDA approval for five dental products and has applied for MDSAP certification. Further, Company has plans to enter in the markets of Australia and Brazil in near future.

Key Risks

• If management is not able to hyper scale our thesis does not hold true- Despite more than 20 years of operations, the company is only 0.5% of the Indian dental market. If the company does not hyperscale & execute its large capex plans, our thesis would not hold true.
• Liquidity risk- Though the business is not affected by this, the company is a sub INR 500 cr company (as of Dec, 21) & traded on the SME exchange. Deterioration in capital markets conditions might lead to very low liquidity in the company on exchanges.
• Geopolitical risks- The company’s manufacturing facilities are based out of J&K. Though the management has not faced any issues due to this, we would constantly track the developments.

Best regards,

Satwik Jain

Fund manager, RH Perennial Fund

Executive Chairman, Generational Capital

RH Perennial Fund is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services (SEBI Registration No. IINA200002601). The information provided in this newsletter does not, and is not intended to, constitute investment advice; instead, all information, content, and materials available in this newsletter are for general informational purposes only. It is safe to assume that we have allocations to all stocks mentioned here and may also sell them without prior notice. The enclosed material is neither investment research nor a piece of investment advice. The contents and information in this document may include inaccuracies or typographical errors and all liability with respect to actions taken or not taken based on the contents of this newsletter are hereby expressly disclaimed.  The views expressed in, or through, this site are those of the individual authors writing in their individual capacities only.