Supriya Lifescience IPO got subscribed 5.69 times at the end of Day 2

Supriya Lifescience Limited (SLL) IPO opened for subscription on 16th December. The IPO got subscribed 5.69 times at the end of Day 2. The company is looking to raise up to Rs 700 crore through the public issue. Here are the details:

About Supriya Lifescience Limited IPO

Supriya Lifescience Limited IPO Date: 16 December - 20 December 2021

Supriya Lifescience Limited IPO Price band: Rs 265 - Rs 274

Supriya Lifescience IPO Issue Size: Rs 700 crore (Fresh issue aggregating up to Rs 200 crore and offer for sale aggregating up to Rs 500 crore)

Reservation: QIB 75%, Retail - 10, NII 15%

Post Issue Market Cap: Rs 2,139 crore to Rs 2,205 crore

Minimum Investment: Rs 14,746

Bid lot: 54 shares, and in multiples of 54 shares

Supriya Lifescience: Objects of the Issue

• The net proceeds from the IPO will be utilized for the following purposes :
• Funding capital expenditure requirements of the company
• Repayment and/ or pre-payment, in full or part, of certain borrowings availed by the company 
• General corporate purposes

About Supriya Lifescience Ltd

• The company was incorporated in 2008, and it is one of the key Indian manufacturers and suppliers of Active Pharmaceutical Ingredients (APIs), with a focus on research and development. 
• SSL focuses primarily on diverse therapeutic areas and niche products.
• It has a niche product offering of 38 APIs focused on diverse therapeutic segments such as antihistamine, analgesic, anesthetic, vitamin, anti-asthmatic, and anti-allergic as of 31 October 2021.
• They were among the largest exporters of Salbutamol Sulphate, contributing to 31% of the API exports from India in FY21 in volume terms.
• SSL's products are registered with various international regulatory authorities such as USFDA, EDQM, NMPA, KFDA, PMDA, TGA, and Taiwan FDA.
• They have filed 14 active DMFs with USFDA and 8 active CEPs with EDQM, for their API products in therapeutic areas such as antihistamine, analgesic, anaesthetic, vitamin, anti-asthmatic, and antiallergic (October 2021).
• The company’s pharmaceutical business is organized into domestic and export sales. Their products are exported to 86 countries to 1,296 customers including 346 distributors.
• SSL’s business operations are supported by a modern manufacturing facility located in Parshuram Lote, Maharashtra.

Outlook of Global Pharmaceutical Industry

The global pharmaceutical market has grown by around 4.8% CAGR from $955 billion in CY14 to $1,270 billion in CY20. It is expected to sustain this growth over the next five years to reach $1,585-1,625 billion in CY25. 

About APIs in India - There are over 2,700 API manufacturers in India. The bulk drugs industry in India is highly fragmented with a major presence of small unorganized players. Unorganized players constitute almost half of the bulk drugs industry. While there are a large number of standalone bulk drug manufacturers, most formulators are backward integrated and also produce bulk drugs.

Supriya Lifescience: Listed Peers

The pharmaceutical industry is highly competitive. The nature of competition varies with respect to therapeutic areas and the type of product. The competitors of Supriya Lifescience include Divi’s Laboratories Ltd, Wanbury Ltd, Unichem Laboratories Ltd, Mangalam Drugs and Organics Ltd, IPCA laboratories Ltd and Teva API B.V.

• Among the listed peers, Supriya Lifescience is the smallest in terms of revenues while the list is topped by Divis Laboratories.
• The Earning Per Share (EPS) for Supriya Lifescience is on the lower side compared to peers. Divis has an EPS of 74.75, while other major players have EPS around 60. Supriya Lifescience has an EPS of 16.92.
• The Return on Net Worth (RoNW) is highest for Supriya Lifescience at 46.04%, while next on the list is Aarti Drug with RoNW of 30.70%.
   

Supriya Lifescience IPO: Financials

• The revenue from operations reported by the company for FY19, FY20, and FY21 is Rs 277.84 crore, Rs 311.64 crore, and Rs 385.37 crore, respectively. The company has shown good growth in terms of revenue.
• The EBITDA for FY19, FY20, and FY21 is Rs 72.76 crore, Rs 109.45 crore, and Rs 178.15 crore, respectively. The EBITDA percent for the same period is 26.19%, 35.12%, and 46.23%, respectively.
• The net profit for FY19, FY20, and FY21 is Rs 39.42 crore, Rs 73.40 crore, and Rs 123.83 crore, respectively.
• The average EPS and RoNW for the last three financial years is 28.75 and 47.76%, respectively.
• As of October 31, 2021, 12 of their existing products are backward integrated, which contributed 67.14% and 60.17% of the total revenue for FY21 and for the 6 months ended September 30, 2021.
• For FY19, FY20, and FY21 the export sales accounted for 70.96%, 71.85%, and 77.47% respectively of its revenue from operations. 
• The top 10 customers contributed 30.24%, 32.09%, and 40.10% of revenue from operations for FY19, FY20, and FY21, respectively.

USPs

Significant scale with leadership position - SSL's strength lies in identifying generic molecules (off-patent) in its existing therapeutic segments which fit into its existing chemistry and production infrastructure. They have a well-established presence in the API market. They are the largest exporters of some of the key APIs.

Backward integrated business model - The backward integration of API ensures a steady supply of intermediates. Its results in increased margins and lesser dependence on suppliers for key starting material. It protects the company from relying on external sources for raw materials, thereby reducing the risk of unfavorable terms of supply such as high pricing and a long timeline for delivery.

Geographically diversified revenues - SSL products were exported to 86 countries including regulated markets such as the USA, China, Japan, Germany, Spain, Indonesia, South Korea, and Switzerland and semi-regulated and non-regulated markets such as Brazil, Mexico, Chile, Taiwan, Malaysia, Bangladesh, South Africa, Kenya, Jordan, and Egypt. Given the wide and diversified geographical presence of the company’s operations, the business model is de-risked from the perspective of low revenue generation or loss from a particular jurisdiction.

Advanced manufacturing and research and development capabilities - It has a modern manufacturing facility located in Parshuram Lote, Maharashtra. The manufacturing facility includes well-delineated areas for R&D, quality control (chemical microbiology), quality assurance, dedicated areas for engineering maintenance, warehouse, materials, and finished goods stores.

Supriya Lifescience: Growth Potential

Expansion of manufacturing capabilities - SSL plans to enhance its production capacity and capabilities through additional capital expenditure in its existing manufacturing facilities. They have also initiated the construction of a new warehouse and administration block (which will house a new quality control and assurance laboratory) to accommodate the rapidly expanding business and its needs. They will also commence production of intermediates for products like Diphenhydramine Hydrochloride, Cetirizine Dihydrochloride, and Tramadol, to enhance their backward integration abilities. 

Expanding product portfolio - Its immediate strategy involves introducing new products. It will continue to drive its R&D initiatives towards the development of innovative APIs. They will also continue to improve R&D capabilities, with a focus on capturing more high-value first-to-market opportunities in key international markets, as well as leveraging a broad product basket to enhance their market position globally.

Increase current market presence - They intend to continue to grow sales in existing geographies in Latin America, North America, Europe, Asia, and the Middle East and to grow their market share in these markets by increasing product portfolio. They plan to create a strong local presence and expertise with the required infrastructure and develop capabilities to exploit the growth potential offered by the relevant markets.

Supriya Lifescience: Risks

Demand reduction - The company generates a significant portion of its revenue from operations from the sale of a limited number of products. The revenue from the sale of these products may decline as a result of increased competition, regulatory action, pricing pressures, or fluctuations in the demand for or supply of such products. If they are unable to continue to sell their top products in the market or maintain historic levels of business from these products, it will impact its revenue.

Limited customers - They are dependent on a limited number of customers for a significant portion of their revenues. They currently do not have long-term contractual arrangements with their customers and conduct business with them based on purchase orders that are placed from time to time. The loss of one or more significant customers or a reduction in the amount of business it obtains from them could have an adverse effect on the business.

Regulation on international business -  The business is subject to risks and challenges associated with international operations, including risks related to complying with several local laws, restrictions on the import and export of certain intermediates, drugs, technologies, multiple taxes, and cost structures, cultural and language factors. If they do not effectively manage their international operations, it may affect the profitability from such countries.

Supriya Lifescience: INDmoney Analysis

Supriya Lifescience has reported a steady 18% CAGR rise in its total revenues between FY19 and FY21, backed by a rise in demand. The company’s topline rose by 24% on-year to Rs 385 crore in FY21. The company’s bottomline increased by a healthy 78% CAGR in the same period. Supriya Lifescience clocked a net profit of Rs 124 crore in FY21. 

The company was able to increase its EBITDA margin from 26% in FY19 to 46% in FY21. The company’s return ratios have also been in a healthy range over the last three years. 

At the higher end of the price band, Supriya Lifescience IPO is attractively priced at a PE ratio of ~17.81 times FY21 EPS (on a fully diluted basis). This is lower than listed peers Divi’s Lab (59 times), Aarti Drugs (24 times) , Solara Active Pharma (20.2 times) and Neuland Labs (28 times).   The company has also reported higher return ratios as compared to its other four mentioned larger peers. 

The global chemicals market is expected to grow at a CAGR of 6.2% from 2019 to 2025 and will be $6,785 in 2025. This gives a very good growth visibility for Supriya Lifescience, given its strong export orientation. The company has consistently been the largest exporter of Chlorpheniramine Maleate and Ketamine Hydrochloride from India.

Given factors such as strong growth in bottomline, healthy margins, robust return ratios, good growth visibility, export visibility, and attractive valuations, we remain “positive” on the prospects of this issue.

Subscription status as on 17th December 2021 (End of Day 2)