IPO Size: Rs. 700 cr IPO (75% reserved for institutions)

• Rs. 200 cr fresh issue for capex (Rs.92 cr) and debt repayment (Rs. 60 cr)
• Rs. 500 cr offer for sale (OFS) by promoter (100% stake to drop to 68%)  

Price band: Rs. 265-274 per share

Mcap: Rs. 2,205 cr, implying 32% dilution

IPO Date: Thu 16^th Dec to Mon 20^th Dec 2021, Listing Tue 28^th Dec 2021

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Company Overview:

Company manufactures niche generic active pharmaceutical ingredients (APIs) and is one of India’s largest exporters of chlorpheniramine maleate, ketamine hydrochloride, salbutamol sulphate, commanding 30-60% export volume market share. On FY21 and H1FY22 revenue of Rs. 385 cr and Rs. 225 cr respectively, 75% came through exports to 86 countries, half of which were from high-margin regulated markets. 

Strengths:

1. Despite no presence in specialty chemicals, it clocked very high margins of 35% at EBITDA level and 24% at net level for FY20, which increased to 46% and 32% respectively in FY21. RoE for FY20, FY21 and H1FY22 exceeded 40%.
2. 65% capacity added in May 2021, increasing installed reactor capacity to 547 KL/day. Rs. 92 cr capex from IPO proceeds will further increase capacity substantially over the next few years, with incremental revenue potential of Rs. 250 cr, considering asset turnover of 3x. 
3. Inexpensive Valuation: Glenmark Life, with Rs. 2,000 cr revenue, 30% EBITDA, 20% PAT margin is ruling at FY22E PE multiple of 16x while Supriya is priced at a PE of less than 14.5x, despite higher EBITDA and net margins of 46% and 30% respectively. While Supriya’s revenue is lower, its 22% revenue CAGR between FY18-21 is greater than Glenmark’s 16%, besides superior RoE.

Concerns:

1. Margins to be monitored: In H1FY22, company’s revenue share of regulated markets increased to 49% from 38% in FY21, but realisation declined vis-à-vis FY21. This along with input price inflation contracted EBITDA margin to 44% from 46%, and net margin to 29% from 32% respectively. Sustainability of high margins needs to be monitored, given net margin in FY19 was as low as 14%.
2. Concentrated product portfolio, with top 3 and top 5 products accounting for 50% and 66% of revenue respectively, any import ban, like for chlorpheniramine maleate, used as an anti-histamine, during Mar-Dec 2020 in China, may impact financials adversely.
3. Large Dilution: The IPO entails a large dilution of 32%, with promoters looking to shrink their 100% holding to 68%, mainly through participation in the OFS. If not for halving of the OFS size from Rs.1,000 cr during DRHP filing in Jul 2021, the dilution would have been much higher.