In the world of pharmaceuticals, active pharma ingredients or APIs form the core as they are the critical and specialized inputs that go into the manufacture of therapeutic formulations. Hitting the IPO market later this week is Supriya Lifesciences, a specialist API manufacturer with a successful track record of 13 years. Supriya has been a consistent performer on the exports front reaching out to over 86 countries. Exports account for 77.5% of the total sales revenues of Supriya Lifesciences for FY21.
Supriya is India’s leading exporter of Chlorpheniramine Maleate, Ketamine Hydrochloride and Salbutamol Sulphate. The company operates in a wide array of specialized therapeutic segments including anti-asthmatic, anti-allergic, anti-histamine, analgesic, anaesthetic and vitamin related products.
Let us look at how the Rs.700 crore IPO of Supriya Lifesciences is structured
- The fresh issue comprises 72.99 lakh shares to public worth Rs.200 crore at the upper price band at Rs.274 per share. The funds will be used for capex and loan repayment.
- Promoter Satish Waman Wagh and the promoter group will sell 182.48 lakh shares in the OFS worth Rs.500 crore at the upper price band of Rs.274 per share.
- Once the IPO process is completed, the promoter stake will come down from 99.98% to 68.24%, while the public shareholding overall will go up to 31.76%.
The limited exposure to the US ensures that Supriya Lifesciences is not caught up in the API price war in the US pharma markets. This has resulted in sales revenues for FY21 growing 38.7% over FY19 and profits growing 3-fold over FY19. EBITDA margins, ROE and net margins showed sustained expansion over FY19.
Supriya Lifesciences is estimated to have a listing market cap of Rs.2,205 crore at the upper band of the IPO price of Rs.274. That would assign a P/E ratio of 17.8 times FY21 earnings. That is reasonable for a business with a stable revenue model, strong entry barriers and better than peer-group ROE.
Should you consider investing in the Supriya Lifesciences IPO?
Broadly, the investment decision about the Supriya Lifesciences IPO would be predicated on a set of parameters.
- With less than 5% revenues from the US markets, the company is away from price wars in the US API market. The improved capacity utilization at 71% has also helped the company post strong growth in sales, profits and operating margins over FY19.
- What should work for the company is the fact that nearly 80% of the fresh funds will be applied to capex and loan prepayment, which are value accretive. This will help expand the franchise and also reduce the solvency risk in a volatile API market.
- Supriya Lifesciences has a strong portfolio of 38 APIs with focus on the research and development. Company generates 77.5% of its annual sales revenues from exports, which de-risks the company from the domestic demand, price and supply cycles.
- What does this boil down to. Now, at a P/E of 17.8X and ROE of over 45% the stock appears to have a clear edge over the peer group. However, Indian API companies (barring Divi’s Laboratories) generally quote around these median valuations. The valuation overhang of API business could be one overhang for Supriya Lifesciences.
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