supriya lifescience ipo detailed analysis
Hi Everyone
This is Lakshmi from EQ Pick. Let talk about
Supriya Lifescience IPO closing tomorrow, As per my view there is nothing to lose in this IPO.
Key point is
Increasing exposure to high-margin regulated markets will support operating margins, while its backward integration plans augur well for the company
- Dominant share in export of key APIs from India
- Benefits from both China-plus and Aatmanirbhar themes
- Investing in capacity & effluent treatment to meet medium-term demand
- Key risks to monitor are product concentration & margin sustainability
- Valuations reasonable; subscribe only with a long-term view
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One thing that the ongoing pandemic has laid bare is the elevated supply-chain risk of dependence on China to manufacture APIs/drugs. This has led to various domestic and global initiatives to reduce this dependence and de-risk the pharma supply chain.
The initial public offering (IPO) of Supriya Lifescience Ltd (SLL) is one such opportunity to benefit from this emerging theme.
Company brief: Leading exporter of key APIs
Incorporated in 2008, SLL has a product portfolio of 38 APIs focused on therapeutic segments such as antihistamine, analgesic, anaesthetic, vitamin, anti-asthmatic and anti-allergic.
With the business focus on exports — 74 percent of sales, the company is the largest exporter of key APIs such as Chlorpheniramine Maleate (as antihistamine) and Ketamine Hydrochloride (as anesthesia) from India. It is also one of the big exporters of anti-asthmatic API Salbutamol Sulphate.
Chlorpheniramine Maleate and Ketamine Hydrochloride, manufactured by SLL, constitute about 50-60 percent of the respective API exports from India.
The production of APIs is facilitated through the USFDA-approved manufacturing facility located at Parshuram Lote in Maharashtra. There are four manufacturing blocks, the fourth was operationalised in June'21.
Operational performance – Exponential growth in EBITDA
In the last 3-4 years, the company's top line has grown by a CAGR of 17 percent. However, the noticeable part is the sharp jump in the EBITDA margin, which has moved from 23 percent in FY19 to 42 percent in the last few quarters. The key factor that drove margin improvement is the operating leverage and the increasing share of sales from the regulated market, which fetch better realisations.
Risks to monitor
Product concentration: At present, the top three API products constitute 52 percent of the sales.
Raw material dependence: The company sources 32 percent of the total raw material requirement from China. Moreover, the RHP mentions that certain raw materials such as Para Chloro Benzyl Cyanide need attention as they rely on limited number of suppliers.
The third aspect to watch is the attrition rate. In the last three years, it has been in the range of 10-22 percent compared to the peer average of 15 percent.
The road ahead
The company's first three manufacturing blocks are nearly optimally utilised. Following the addition of the fourth manufacturing block, the aggregate capacity utilisation is now 49 percent. SLL is now building capacity for the future by investing in a fifth manufacturing block. The management asserts that it takes about two years to commission a new block, and, by that time, the fourth manufacturing block will be reasonably sweated.
SLL has about 3.5 acres of land available at Parshuram Lote and a vacant site at Ambernath for future expansion. Further, the company has a product pipeline of 13-14 APIs to which 3-4 products are added every year by the R&D team. The pipeline consists of products such as Dextromethorphan Hydrobromide (decongestant), Pentoxifylline (xanthine derivatives), (S)-Ketamine Hydrochloride (analgesic/anti-pyretic/ anaesthetic), Phenylephrine Hydrochloride (decongestant), Allopurinol (antigout) and Benfotiamine (diabetic neuropathy).
The other instance of future preparedness is the investment in ETP (Effluent Treatment Plant). While the current set of ETPs is sufficient for the existing manufacturing blocks, the company will invest in a higher capacity ETP through the IPO proceeds.
At a strategic level, SLL is a play on both China-plus and Aatmanirbhar Bharat. Since the company has a dominant presence in a few of the APIs, export opportunities are expected to remain strong.
Among the key strengths are the company's 12 products, contributing to 67 percent of sales, that are backward integrated to the level of basic chemicals. This not only helps in better margins but also reduces the risk from supply-chain disruptions. The company is extending backward integration by starting the production of intermediates for products such as Diphenhydramine Hydrochloride, Tramadol Hydrochloride and Allopurinol.
On other strategic growth plans, CDMO, CMO and JVs are likely to be explored in the future.
As far as valuations are concerned, multiples are reasonable and within the range for the API sector. Among the closest competitors are unlisted Keshava Organics and loss-making Wanbury.
The key thing that differentiates it from the rest in the API universe is the extraordinary margins and that's something one needs to monitor in terms of sustainability. Hence, we suggest investors looking to have exposure to API as a theme to subscribe to the issue for the long term only.