Supriya Lifescience Limited IPO

About the company:

The onslaught of IPOs this festive season continues and investors have yet another money-making opportunity in line. Supriya Lifescience Limited’s IPO, with an issue size of Rs. 700 crores will be hitting the markets today. The IPO comprises of a Fresh Issue of Rs. 200 crores and an Offer for Sale worth Rs. 500 crores.

Issue Details

Ø  Dates: December 16, 2021 to December 20, 2021

Ø  Price Band: Rs. 265 to Rs. 274 per share

Ø  Minimum Lot: 54 shares

Ø  Minimum Application Amount: Rs. 14,796

Objects of the Issue

Proceeds from the fresh issue are expected to be utilized towards:

Ø  Funding capital expenditure requirements to the tune of Rs.  92 crores

Ø  Repayment and/or pre-payment of certain borrowings availed worth Rs. 60 crores.

Ø  The remainder for general corporate purposes.

Company Overview

Supriya Lifescience Limited (SLL), incorporated in 2008, is one of the key Indian manufacturers and suppliers of active pharmaceuticals ingredients (APIs), with a focus on research and development. In simple terms, API is a key raw material for the pharmaceutical industry that gives the final product the claimed therapeutic effect.

The company has an offering of 38 APIs which are niche and high value products as on October 31, 2021. The company boasts of a leadership position in therapeutic areas such as antihistamine, anti-asthmatic and anesthetic. They have consistently been the largest exporter of Chlorpheniramine Maleate and Ketamine Hydrochloride from India. Additionally, the company was among the largest exporters of Salbutamol Sulphate, contributing to 31% of the API export volumes from India in FY21.

The products have a wide reach and are exported to 86 countries and cater to 1,296 customers including 346 distributors. In FY21, the export: domestic revenue mix at 78:22 was skewed in favor of exports.

Manufacturing Facilities and R&D

SLL has a modern manufacturing facility located in Parshuram Lote, Maharashtra, with a capacity of 547 KL/day spread across 23,806 sq.mt. which comprises of 4 manufacturing blocks, segregated as per therapeutic segments. The 4th block commenced operations on May 30, 2021. Capacity utilization has consistently gone up to 71% in FY21 from 63% in FY19. Due to the addition of the 4th block recently, the capacity utilization has dropped to 49% in H1 FY22. Moreover, the acquisition of another plot of land admeasuring 12,551 sq.mt. near its existing manufacturing facility provides scope for further manufacturing infrastructure expansion.

SLL’s R&D efforts are primarily focused across the value chain of API process development. As on October 31, 2021, SLL has a team of 23 scientists. Their R&D efforts are demonstrated by a strong pipeline of products. The company’s products are registered with various international regulatory authorities including 14 active Drug Master File (DMFs) with USFDA and 8 active Certificate of Suitability (CEPs) with EDQM.

The API manufacturer also has filed 3 process patents in India and 2 with the World Intellectual Property Organization (WIPO).

Financial Snapshot

SLL has an extremely robust financial profile with revenue/EBITDA/PAT registering a 3-year CAGR growth 17.7%/56.2%/78.3%. Improvement in profitability is primarily due to the strategy to focus on regulated markets where the average selling price of products is higher. Total borrowings as on September 30, 2021 stood at Rs. 71 crores while net worth stood at Rs. 335 crores, translating to a D/E ratio of 0.22. A back of the envelope calculation reveals that the D/E ratio could fall to as low as 0.02 after IPO proceeds are utilized to pay off debt. Another notable fact is that the company has positive operating cash flows since inception.

Strengths:

Ø  Significant scale with leadership position across key and niche products.

Ø  Consistently strong financial performance due to de-risked business model.

Ø  Backward integrated in 12 out of 38 products, which translate to higher margins and lower dependence on suppliers for key starting level materials.

Ø  Geographically diversified revenues with a global presence across 86 countries.

Ø  Long standing relationships with marquee customers. The company has a business relationship for over 9 years with Syntec Do Brasil LTDA, American International Chemical Inc and AT Planejamento E Desenbolvimento De Negocios Ltda.

However, the company does have a few risks:

Ø  Product concentration: A significant portion of revenue is derived from sale of products in certain therapeutic areas and any reduction in demand and availability of alternatives could have an adverse effect.

Ø  Customer concentration, absence of long-term contracts: The company is dependent on a limited number of customers for a significant portion of revenue. For FY21, the top ten customers contributed 40% which went up to 47% in H1 FY22. Further, absence of long-term contractual arrangements with significant customers is a big risk.

Ø  Geographical Concentration: The presence of all manufacturing operations in a single location exposes the company to threats from significant economic and civil disruptions or natural calamities.

Ø  While revenues and expenses denominated in foreign currencies offset fluctuations in exchange rates, the balance revenues and expenses are still impacted by fluctuations.

Ø  Despite being an R&D focused company, the R&D spend accounted for a mere 0.40% and 0.64% in FY21 and H1 FY22.

Peer Comparison

Samco’s Stance:

Supriya Lifescience Limited has demonstrated a robust financial performance over the last three years. The margins have consistently improved owing to backward integration and focus on regulated markets. The company does face a few operational risks in terms of product and customer concentration.  Nevertheless, among peers, SLL boasts of the highest ROE and the one of the lowest D/E ratios which is expected to drop further after utilizing proceeds from the IPO. With a P/E of 15.2x based on the annualized FY22 earnings, at the upper price band, which is lower than the industry average, the issue seems to be fairly priced. Considering the tailwinds in the industry, especially the ‘China Plus One’ strategy, the company has strong growth potential. Thus, we recommend investors to ‘SUBSCRIBE’ to this IPO.

(Source: RHP)