Glenmark Life Sciences Ltd. (GLS), the subsidiary of pharma major Glenmark Pharmaceuticals Ltd., is planning to raise up to Rs 1,500 crore through an IPO. It will open on July 27 and close on July 29, 2021.
IPO details
GLS is coming up with an initial public offering (IPO) with 2.102 - 2.155 crore shares (fresh issue: 1.472 - 1.525 cr shares; OFS shares: 0.630cr shares) in offering. The offer represents around 17.16 percent of its post-issue paid-up equity shares of the company. The total IPO size is Rs. 1,497.9 - 1,513.6 crore.
The issue is through book building process with a price band of Rs 695 - 720 per share. The issue is a combination of fresh and OFS.
The company will not receive any proceeds from the OFS portion. Of the net proceeds from the fresh issue, Rs 800 crore will be utilized for the payment of outstanding purchase consideration to the promoter for the spin-off of their API business into the company, another Rs. 152.8 crore will be used to fund the capital expenditure requirements.
Fifty percent of the net issue will be allocated on a proportionate basis to qualified institutional buyers, while rest 15 percent and 35 percent is reserved for non-institutional bidders and retail investors, respectively. The promoter currently holds 100.00 percent stake in the company and post-IPO this will come down to 82.84 percent. Public holding will increase from current nil to 17.16 percent.
Key competitive strengths
Leadership in select high value, non-commoditized APIs in chronic therapeutic areas
Strong relationships with leading global generic companies
Quality-focused compliant manufacturing and R&D infrastructure
Strong focus on sustainability in operations
Cost leadership across products through careful monitoring and continuous effort
Experienced management team with proven track record
Risk and concerns
Unfavorable government policies
Difficulties in new client addition
Unfavorable forex movements
Unfavorable movements in key raw material prices
Competition, peer comparison, and valuation
At higher price band of Rs. 720, GLS is demanding a P/E valuation of 25.1x (to its restated FY21 EPS of Rs. 28.7), which is at discount to the peer average of 37.5x
API markets growth
The global active pharmaceutical ingredient (API) market was estimated to be around $181.3 billion in FY20 and is expected to grow at 6.2 percent CAGR to reach to about $259.3 billion by FY26. India, with an estimated market share of 6 percent, has reported a growth rate of 9 percent CAGR during FY16-20. India has contributed significantly to the global generics market by fulfilling 20 percent of the global demand in generics in terms of volume, thereby making itself the largest provider of generic medicines globally.
Currently, India has highest number of USFDA approved plants outside of the United States as well as 44 percent of global abbreviated new drug applications. India’s API market is further expected to expand by 9.6 percent CAGR over FY21-26.
Glenmark Life Sciences GLS is a leading developer and manufacturer of high value, non-commoditized APIs and its portfolio comprises of 120 products (10 products in laboratory development; four products in laboratory validation and 106 products being commercialized) ranging across various therapy areas like cardiovascular, central nervous system disease, diabetes, anti-infectives and others.
The company also provides contract development & manufacturing operations (CDMO) services to a range of multinational and specialty pharmaceutical companies.
As on FY21, APIs and CDMO contributed around 91 percent and 8 percent to the revenue, respectively.
The total market size for these 120 products globally was estimated to be around $142 billion in 2020 and is expected to grow by 6.8 percent CAGR over the next five years to reach a size of $211 billion by 2026. The future growth of these products is expected to remain stable driven by the rising prevalence of non-communicable diseases and growing demand from the regulated markets for drugs.
It is a R&D driven API manufacturer. As of 31 May 2021, the company owned or co-owned 39 granted patents and had 41 pending patent applications in several countries and six pending provisional applications in India. Also, the company has filed 403 DMFs and CEPs across various major markets (i.e. United States, Europe, Japan, Russia, Brazil, South Korea, Taiwan, Canada, China and Australia). Going forward, the company intends to develop 8-10 molecules per year.
Manufacturing facilities
GLS has four high quality multi-purpose manufacturing facilities with an annual installed capacity of 726.6 kilo liters, situated in the state of Gujarat (Ankleshwar and Dahej) and Maharashtra (Mohol and Kurkumbh). Since 2015, these facilities had 38 inspections and audits by global regulators, but haven’t received any warning letters or import alerts.
In the near-term, to support the growth in the generic and proposed development of the oncology products, the company intends to increase its capacities at the Ankleshwar facility during FY22 and at Dahej facility during FY22-23. Aggregate installed capacity is likely to increase by 200 kilo liters by FY23. Further, it also intends to develop a new facility for generic APIs and for CDMO business, which will be operational by Q4 FY23.
GLS’s products are sold in both regulated markets and emerging markets with regulated markets contributing 65-70 percent of the business. According to the management, these regulated markets will continue to be the focus and growth areas for the company.
As of March 31, 2021, 16 of the 20 largest generic companies globally were its customers. GLS derived around half of the business from the overseas markets like Europe, North America, Latin America, Japan etc. Its clientele includes Glenmark, Teva Pharmaceutical, Torrent Pharmaceuticals, Aurobindo Pharma, Krka etc. Glenmark is the single largest customer, contributing around 40 percent of the revenue.
Financial performance
On financial performance front, GLS has demonstrated a solid business growth with consistency in the profitability margins. On the back of increased sales of APIs over FY19-21, the company has reported a 45.8 percent CAGR rise in the operating revenue to Rs1,885.2 crore in FY21.
Total operating expenditure increased by 42.3 percent CAGR (lower than top-line growth), thereby leading to a 54.5 percent CAGR rise in EBITDA to Rs. 591.1 crore in FY21. EBITDA margin expanded by 341bps over FY19-21 to at 31.4 percent in FY21. With increased capacity expansion across the facilities, depreciation charge increased by 31.7 percent CAGR.
Finance cost increased exponentially over FY19-21, mainly linked to the higher interest expenses towards the purchase of the API business of the promoter. As a result, reported PAT increased by 34.1 percent CAGR to Rs. 351.6 crore in FY21. PAT margin contracted by 342bps during the period to 18.6 percent in FY21.
GLS reported a positive cash flow from operating activities during the period. Average operating cash flow stood at Rs. 291.6 crore during FY20-21. With robust cash flows in excess of the capex requirement, the company repaid financial liabilities, which declined by 9.9 percent CAGR over FY19-21. Consequently, debt to equity ratio improved from 13.3x in FY19 to 1.3x in FY21. Pre-issue, RoIC and RoE stood at 55.5 percent and 46.7 percent respectively.
Should you subscribe?
Choice Broking said, "Going forward, based on our quick estimate, we are anticipating an 18.7 percent CAGR rise in the top-line over FY21-24 to Rs. 3,154.2 crore in FY24E. EBITDA and PAT margin are expected to expand by 333bps and 594bps, respectively, to 34.7 percent and 24.6 percent in FY24E. Bottom-line will be boosted by lower finance costs, which in-turn resulting from the utilization of IPO proceeds to lower the related parties financial liabilities."
At higher price band of Rs. 720, GLS is demanding a P/E valuation of 25.1x (to its restated FY21 EPS of Rs. 28.7), which is at discount to the peer average of 37.5x. However, based on the forecasted FY24E earnings, the demanded valuation comes out to be 11.4x, which seems to be attractive for a company generating a RoE of around 20%. Thus, considering the business growth outlook and almost stable operating margins, Choice Broking assigns a “SUBSCRIBE” rating for the issue.
