Supriya Lifescience Limited - IPO Note

Pharmaceuticals & Drugs - API

Supriya Lifescience Limited - IPO Note

Pharmaceuticals & Drugs - API

Price range
Rs. 265 to 274
Issue Period:
Dec 16, 2021
Dec 20, 2021
Rating
Subscribe
December 16, 2021

Stock Info

Sensex
57994.20
CNX Nifty
17256.30
Face value (Rs.)
2
Market lot
54
Issue size
Rs. 700 cr.
Public Issue
8.0 cr. shares
Market cap post IPO
2205 cr.
Equity Pre - IPO
14.64 cr.
Equity Post - IPO
16.04 cr.
Issue type
Fresh Issue & Offer for Sale

Shareholding (Pre IPO)

Promoters
99.26
Public
0.74
Source: Ace equity, StockAxis Research

Shareholding (Post IPO)

Promoters
67.59
Public
32.41
Source: Ace equity, StockAxis Research

Key Strengths & Strategies

Backward integrated business model:
As on October 31, 2021, 12 of their existing products are backward integrated, which contributed 67.14% and 60.17% of the total revenue for Fiscal year 2021 and for the six month period ended September 30, 2021, thereby resulting in increased margins and lesser dependence on suppliers for key starting material. With the ability to meet intermediates and processes requirements in-house, their integrated business model helps them to have sustainable business.

Geographically diversified revenues:
The global pharmaceutical market can broadly be divided into regulated markets, semi-regulated and non-regulated markets.

From April 1, 2020 until October 31 2021, company’s products were exported to 86 countries including:

  • Regulated markets such as USA, China, Japan, Germany, Spain, Indonesia, South Korea and Switzerland; and
  • Semi-regulated and non-regulated markets such as Brazil, Mexico, Chile, Taiwan, Malaysia; Bangladesh, South Africa, Kenya, Jordan and Egypt, through their own marketing and distribution network as well as by entering into distribution arrangements with pharmaceutical distributors in these markets.

Company’s business model is de-risked from the perspective of low revenue generation or loss from a particular jurisdiction or from products of a particular therapeutic segment.

leadership position across key & niche products:
Company’s core strength lies in identifying generic molecules (off-patent) in their existing therapeutic segments which fits in to their existing chemistry and production infrastructure and their ability to develop the product and scale-up production. With their focus on products which are high on value and low on competition, they are well positioned to derive relatively higher returns from their investments.

Some products:

  Expected growth in global market (2020-2025) Revenue in Fiscal 2020 (in crore) Previous growth in global market (2015- 2020) Revenue in Fiscal 2015 (in Crore)
Benfotiamine 5-10% 17.00 6.6% 12.06
S-Ketamine Hydrochloride 5-10% 0.50 5.6% 0.37
Phenylephrine Hydrochloride 5-10% 43.00 7.6% 28.91

The company is in the process of further diversifying their product portfolio with strong product pipeline and they have already started initial phase of production, which are primarily used for distribution of samples to different customers, primarily in unregulated markets. They are in the process of commencing commercial production of these products.

Industry

Peer comparison

Particulars (Rs. in Crores) FY21 Revenue CAGR (FY19 - FY21) EBITDAM (%) PATM (%) RONW (%) EPS PE (x)
Supriya Lifescience Ltd 18.00% 43.41% 32.13% 46.04% 16.92 -
Solara Active Pharma ltd 7.97% 22.00% 13.67% 13.90% 61.62 20.50
Neuland Laboratories Ltd 18.52% 16.00% 8.64% 10.25% 62.85 27.70
Aarti Drugs Ltd 17.50% 20.00% 13.00% 30.70% 30.08 24.10

Key Risk Factors

Revenue concentration risk:
They generate a significant portion of the revenue from operations from the sale of a limited number of products. The following table sets forth details of revenue contribution of the top three, top five and top 10 API and related products, for the Fiscals 2019, 2020 and 2021 and for the six month period ended September 30, 2021:

  Top three API and related products Top five API and related products Top 10 API and related products
Year Revenue As % of revenue from operations Revenue As % of revenue from operations Revenue As % of revenue from operations
FY19 135.26 48.68 178.23 64.15 225.89 81.3
FY20 169.72 54.46 207.85 66.69 268.20 86.06
FY21 194.26 50.41 245.79 63.78 312.12 80.99
April 1 to Sep 30 2021 117.21 52.14 148.72 66.16 193.19 85.94

Revenue from the sale of these products may decline as a result of increased competition, regulatory action, pricing pressures or fluctuations in the demand for or supply of such products.

Customer Concentration risk:
Revenue from top 3 customer has significantly increased from 14.55% in FY19 to 21.59% in FY21. Further, they currently do not have long term contractual arrangements with their customers and conduct business with them on the basis of purchase orders that are placed from time to time. Further, some of the customers currently manufacture or may start manufacturing their own APIs and may discontinue purchasing APIs from them.

  Top three Customers Top 10 Customers
Year Revenue As % of revenue from operations Revenue As % of revenue from operations
FY19 40.44 14.55 84.02 30.24
FY20 51.63 16.57 100.00 32.09
FY21 83.20 21.59 154.53 40.10
April 1 to Sep 30 2021 69.64 30.98 105.96 47.13

Unfavourable government policies and regulations:
Company operate in a highly regulated industry and their operations are subject to extensive regulation in each market in which they do business. All aspects of the business, including research and development activities, manufacturing operations and sales and marketing activities, are subject to extensive legislation and regulation by various local, regional, national and overseas regulatory regimes.

Company Description

Supriya Lifescience Limited (“SLL”) was incorporated on March 26, 2008. Company is manufacturers of active pharmaceuticals ingredients (“APIs”), with a focus on research and development.

As of October 31, 2021, company has niche product offerings of 38 APIs focused on diverse therapeutic segments such as antihistamine, analgesic, anaesthetic, vitamin, anti-asthmatic and anti-allergic. They have consistently been the largest exporter of Chlorpheniramine Maleate and Ketamine Hydrochloride from India. They were among the largest exporters of Salbutamol Sulphate contributing to 31% of the API exports from India in FY 2021 in volume terms.

Company’s products are registered with various international regulatory authorities such as USFDA, EDQM, NMPA (previously known as SFDA), KFDA, PMDA, TGA and Taiwan FDA. As of October 31, 2021, they have filed 14 active DMFs with USFDA and 8 active CEPs with EDQM.

Company’s pharmaceutical business is organized into domestic and export sales. As of October 31 2021, their products were exported to 86 countries to 1,296 customers including 346 distributors.

Company’s customers include global pharma companies such as Syntec Do Brasil LTDA, American International Chemical Inc and AT Planejamento E Desenbolvimento De Negocios Ltd., with whom It had a business relationship for over nine years, and Suan Farma Inc, Acme Generics LLP, Akum Drugs Ltd and Mankind Pharma Ltd with whom it has a business relationship for over four years.

Company’s business operations are supported by a modern manufacturing facility located in Parshuram Lote, Maharashtra, spread across 23,806 sq.mt. They have 4 manufacturing blocks which are segregated therapeutic segment wise. The 4th block commenced operation in May 30, 2021.

Valuation

In the last 3 years, Its financial performance has been healthy with revenue and PAT CAGR of 17.7% and 77.2% over FY19-21. The company has seen its margins increase by 850 basis points in the past year. It is one of the key Indian manufacturers and suppliers of active pharmaceutical ingredients (APIs), with an emphasis on research and development where they plan to expand their business and overall presence in the market.

Company stands to benefit from the positive industry growth trends given that it has a significant scale with a leadership position across key & niche products. Its backward integration of API ensures a steady supply of intermediates. At higher price band of Rs. 274, company is demanding a P/E multiple of 17.8x (to its FY21 earning of Rs. 15.4), which is at discount to the peer average of 31.4x.

We believe that the company's new manufacturing unit and product launch will be growth drivers for the company in future. Hence, we recommend “SUBSCRIBE” to the IPO.

Key Information

Use of Proceeds:
The IPO is made up of offer for sale of Rs 500 Cr by promoter and fresh issue of 200 Cr, total issue size of Rs 700 Cr

Proceeds from fresh issue will be used for:

  1. Funding capital expenditure requirements of the company.
  2. Repayment certain borrowings.
  3. General Corporate Purposes

Book running lead managers:
Axis Capital Limited ICICI Securities Limited

Management:
Satish Waman Wagh is the Promoter, Chairman and Managing Director of the company. He is also director on the boards of Supriya MediChem Pvt Ltd, Lote Industries Testing Laboratory Association and Sachin Industries Ltd. Smita Satish Wagh is the Whole-time Director of the company. She is also a director on the boards of Supriya Medi-Chem Pvt Ltd. Balasaheb Gulabrao Sawant is the Whole-time Director of the company. He was previously associated with companies such as USV Ltd, Emcure Pharmaceuticals Ltd, Arch Pharmalabs Ltd, Mylan Laboratories Ltd and Enaltec Labs Pvt Ltd.

Financial Statement

Profit & Loss Statement:- (Consolidated)

Particulars (Rs. in Crores) FY19 FY20 FY21
Revenue from Operations 277.84 311.64 385.37
COGS 146.87 138.49 128.13
Gross Profit 130.97 173.15 257.24
Gross Margin (%) 47.14% 55.56% 66.75%
Employee Benefit Expenses 18.97 25.59 32.76
Other Expenses 47.25 49.18 57.18
EBITDA 64.74 98.38 167.30
EBITDA Margin (%) 23.30% 31.57% 43.41%
Depreciation 5.44 6.38 6.68
EBIT 59.31 92.00 160.62
EBIT Margin (%) 21.35% 29.52% 41.68%
Finance Cost 10.22 6.85 4.08
Oher Income 8.02 11.07 10.86
Profit Before Exceptional Items & Tax 57.11 96.22 167.39
Exceptional Items - - -
Profit Before Tax 57.11 96.22 167.39
Tax 0.06 22.82 43.57
Effective Tax Rate (%) 0.10% 23.72% 26.03%
Profit After Tax 57.05 73.40 123.83
PAT Margin (%) 20.53% 23.55% 32.13%
Earnings Per Share (Rs.) 5.39 10.03 16.92