Verdict: Growth and Margins justify Pricing
Gland Pharma is launching a Rs. 6,480 crore IPO on Monday 9th November 2020, 20% of which, comprises fresh issue of Rs. 1,250 crore and 80% an offer for sale (OFS) of up to 3.49 crore equity shares of Re.1 each, almost equally by Chinese promoter Fosun Pharma and company’s original Hyderabad-based founding family, in the price band of Rs. 1,490-1,500 per share. Issue represents 26.5% of the post-issue share capital, with closing and listing on 11th and 20th November respectively.
Objects of Issue and Shareholding:
Rs. 1,250 crore fresh issue proceeds will go towards (i) Rs. 770 crore working capital (ii) funding Rs. 168 crore of Rs. 230 crore capex. These objects can be easily met from internal accruals, as company has Rs. 1,525 crore cash and equivalents (30-6-20) along with annual cash profit generation of Rs. 1,250 crore. Unnecessary dilution may limit growth in RoE, which stood at 21% for FY20 and 8% for Q1FY21.
Promoter Fosun Pharma’s 74% holding will shrink to 58% post listing, while company’s founding family headed by Mr. PVN Raju, who had pioneered heparin technology in India in 1970s, will have their 20% stake decline to 9.9%.
B2B Generic Injectibles Company
Gland Pharma is present in sterile injectables, oncology, ophthalmics, deriving 80% of Rs. 2,600 crore FY20 revenue from international markets, especially US, which accounts for 66% of revenue. It has 4 US FDA approved formulation facility and 3 captive API plants in South India, with 267 US ANDA filings (with partners), of which, 215 are approved. Going forward, company’s focus will be B2B international markets, with China, the 2nd largest generic injectable market, being a significant growth driver, where parent’s established local presence may come in handy.
Strong Financial Margins
Clocked 27% revenue CAGR between FY18-20, with 37% CAGR in EBITDA to Rs. 1,095 crore, translating into 42% EBITDA margin and 29% PAT margin. 18 new product launches and higher demand of key molecules in US, Europe, Canada, Australia in Q1FY21 lead to 31% YoY surge in June quarter revenue to Rs. 884 crore, with EBITDA and PAT margins strengthening to 50% and 35% respectively. Q1FY21 EPS rose to Rs. 20 vis-à-vis Rs. 50 for FY20. Despite a high inventory holding period of over 3.5 months keeping working capital needs elevated, FY20 RoE grew to 21%, from 16% YoY. Interesting, FY19 had Rs. 20 crore exceptional loss as separation compensation for founder’s son and former MD Dr. Ravi Penmetsa, who joined parent Fosun Pharma as a director, within 2 months of separating from Gland. Such an exception item is truly unusual!
At Rs. 1,500, company’s market cap will be Rs. 24,493 crore, translating into FY20 and FY21E PE multiples of 30x and 21x respectively. While there are no like-to-like peers, pharma companies such as Natco and Syngene with 20%+ net margins and in the Rs. 20,000 crore market cap range are ruling at FY21E PE multiples of 35-50x, making Gland’s pricing attractive. Fosun’s buy price of Rs. 605 per share in Oct 2017, yields it CAGR return of 35% in 3 years, whereas company’s EBITDA and PBT grew at a 37% and 41% CAGR between FY18-20 respectively, justifying issue pricing. Company’s size of operations, healthy growth and superior margins are likely to keep institutional interest high, post listing too. If promoter being a Chinese company raises concern, that’s for the regulators to decide and a personal call to be taken by the prospective investors, similar to making a choice for ESG or Shariah investing.
Despite recent IPOs being a mixed big, potential for listing gains is seen. And for portfolio investing, share is a very good pick, given its superior margins and healthy growth rates.
Grey Market Premium (GMP) of Gland Pharma: Grey Market Premium of Gland Pharma is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.
Disclosure: No Interest.