About the company:
Glenmark Life Sciences (GLS) is the latest among the slew of IPOs to hit the market in the next few days. The IPO has an issue size of Rs. 1,514 crores comprising of a fresh issue aggregating to Rs. 1,060 crore and an offer for sale of Rs. 454 crores. The price band has been set between Rs. 695 to Rs. 720 per share for a lot size of 20 shares. Post the issue, the implied market capitalization of the company is expected to stand between Rs. 8,552 and 8,822 crores based on the lower and upper price bands, respectively. Currently, the promoters hold 100.00 percent of the shares. Post listing the shares held by promoters will be diluted to 82.84 percent.
Company Overview:
GLS is the wholly owned subsidiary company of Glenmark Pharmaceuticals, a global pharmaceutical company. It is a leading developer and manufacturer of select high value, non-commoditized APIs in chronic therapeutic areas, including cardiovascular disease (CVS), central nervous system disease (CNS), pain management and diabetes. The company operates two business lines, namely – Generic API and Contract Development and Manufacturing Operations (CDMO). The company has a portfolio of 120 molecules globally.
The API portfolio comprises of specialized, niche and technically complex molecules. The CDMO business currently comprises of obtaining permission to market products in regulated markets and contract manufacturing of APIs.
Financial Snapshot:
|
(in Rs.
Crore)
|
FY19
|
FY20
|
FY21
|
3 - year CAGR
|
|
Revenue
|
886
|
1,537
|
1,885
|
45.8 Percent
|
|
EBITDA
|
248
|
472
|
591
|
54.5 Percent
|
|
EBITDA Margin ( Percent)
|
27.9 Percent
|
30.7 Percent
|
31.4 Percent
|
-
|
|
PAT
|
196
|
313
|
352
|
34.1 Percent
|
|
PAT Margin ( Percent)
|
22.1 Percent
|
20.4 Percent
|
18.6 Percent
|
-
|
|
EPS
|
24.64
|
29.04
|
32.61
|
15.0 Percent
|
|
Net Worth
|
88
|
402
|
753
|
192.5 Percent
|
|
Debt (payable
to parent)
|
1,162
|
1,059
|
933
|
-
|
|
ROE
|
99.25 Percent
|
77.94 Percent
|
46.71 Percent
|
-
|
|
ROCE
|
32.17 Percent
|
30.77 Percent
|
32.69 Percent
|
-
|
Revenue, EBITDA and net profit have seen stellar growth on a CAGR basis in the last three years. EBITDA margin has also improved steadily but the net profit margin witnessed a downtrend on account of higher interest costs on the liability owed to the parent, Glenmark.
GLS owed Rs. 933 crores to its parent as on March 31, 2021. This amount had reduced to Rs. 800 crores as on July 9, 2021. The IPO proceeds would be used to pay off this debt completely which will reduce interest costs going forward. The company has witnessed a robust growth in cash flow and stands with a healthy cash balance of Rs. 116 crores.
ROCE has risen steadily to 32.69 percent and is one of the highest among peers. ROE, on the other hand, saw a sharp downfall which was mainly on account of a gradually increasing equity base, as is the case with a newly spun-off / formed company. Nevertheless, ROE at 46.71 percent was the highest in the industry.
Manufacturing Prowess and R&D Capabilities:
With four manufacturing facilities located at Ankleshwar and Dahej in Gujarat and Mohol and Kurkumbh in Maharashtra, GLS boasts of a combined capacity of 726.6 KL with an average capacity utilization of 82 percent. They intend to increase their API manufacturing capabilities by enhancing existing production capacities at Ankleshwar during FY22 and Dahej during FY22-23 by 200 KL. Additionally, the company will set up a new greenfield project which should be functional by Q4 FY23 and will reach a capacity of 800 KL in the next 3 to 4 years. The capex for this new facility would be funded from internal accruals and debt (if required).
R&D operations are fulfilled through three dedicated R&D units with a headcount of 213 employees. Expenditure on R&D activities at 2.15 percent, 2.60 percent and 2.67 percent of total revenue from operations in FY21, FY20 and FY19, respectively showed a downtrend. As of May 31, 2021, they own / co-own 39 granted patents and had 41 patents pending approval in different countries. They intend to introduce 8-10 new molecules every year.
Strengths:
Leadership in select high value, non-commoditized APIs in chronic therapeutic areas.
Strong relationships with leading global generic companies. 16 of the 20 largest generic customers globally were their customers. Approximately 69 percent of the customers were period-on-period repeat customers since FY19.
Cost leadership across products through careful monitoring and continuous effort.
Quality-focused compliant manufacturing and R&D infrastructure. GLS has not received any warning letters or import alerts from any regulatory authorities.
As mentioned earlier, the company demonstrates a strong financial profile and healthy profitability.
However, the company does have a few risks:
Customer concentration – Their top 5 customers contribute 54.35 percent of the revenue which gives them great bargaining power. Loss of any major customer could adversely affect the topline.
A significant portion of revenue is derived from a few key products. Increased competition, pricing pressure, fluctuation in demand or supply of products, breakthroughs in development of alternative drugs, could trigger a decline in the earning capability.
As much as 40 percent of the company’s raw materials are sourced from China. Geopolitical tensions could hamper production. On the upside, dependance on China for raw materials has gradually decreased.
Conflicts may arise in negotiation and dealing with Glenmark Pharmaceuticals, with respect to the contractual arrangements. The parent company is their largest customer and with no non-compete agreement in place, GLS’ business could be adversely impacted.
Increasing number of receivables have been unpaid for more than 180 days. Any further delay in receipt could impact operations as GLS has a large requirement for working capital.
Conclusion:
|
Company
|
P/E
|
ROE
|
ROCE
|
|
Glenmark
Life Sciences
|
22.08x
|
46.7 Percent
|
32.7 Percent
|
|
Divi’s
Laboratories
|
63.65x
|
23.9 Percent
|
32.0 Percent
|
|
Laurus
Labs
|
36.59x
|
45.2 Percent
|
39.6 Percent
|
|
Shilpa
Medicare
|
33.37x
|
10.5 Percent
|
8.0 Percent
|
|
Aarti
Drugs
|
24.28x
|
35.8 Percent
|
34.7 Percent
|
|
Solara
Active Pharma
|
25.83x
|
17.2 Percent
|
16.0 Percent
|
GLS has the lowest P/E and a fair P/S in comparison to its peers, but provides superior returns to shareholders. Moreover, the company is a market leader in select APIs backed by strong parentage and demonstrates good financial health, which makes it attractive at the price offered. Thus, we recommend investors who are looking for listing gains to subscribe to the IPO.
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