Akums Drugs IPO

Akums Drugs IPO will open for subscription on July 30, 2024 and close on August 1, 2024. Below is a breakdown of the generic drug maker's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Akums Drugs IPO in a nutshell

• Quality : The company's three-year average ROE and ROCE was nearly -8.8 and 3 per cent, respectively, between FY22 and FY24.
  
• Growth : The company's revenue grew 6.7 per cent per annum between FY22-FY24. It reported a profit after tax of Rs 1 crore in FY24 from a loss of Rs 251 crore in FY22.
  
• Valuation : Post the IPO, the stock will be valued at a P/E and P/B ratio of 13356 and 7.3 times, respectively.
  
• Overview: India's pharmaceutical industry is growing at a rapid pace with the country emerging as the largest generic (off-patent) drug manufacturer in the world. The 'China plus one' strategy adopted by global players has further pushed the industry in the limelight. Akums Drugs stands to benefit from this trend, particularly due to its large scale. However, the strict regulatory environment and highly competitive nature of the generic business can impact its performance.

About Akums Drugs

Incorporated in 2004, Akums Drugs is a pharmaceutical contract development and manufacturing organisation (CDMO). Operating 11 manufacturing across India, it is the largest India-focused CDMO company in terms of revenue and production capacity. It manufactures an extensive range of finished dosages and active pharmaceutical ingredients (APIs) and counts large players like Sun Pharma, Dr Reddy's and Mankind Pharma among its clients. It derives most of its earnings from India business with the domestic operations contributing 94 per cent to its total revenue in FY24.

Strengths of Akums Drugs

• Large scale: The company's scale is its biggest strength. It can manufacture nearly 50 billion finished dosages annually through its 11 manufacturing facilities. It is the largest India-focused CDMO company and manufactures generic drugs for major Indian pharmaceutical companies. Additionally, it retains most of its clients with 76 per cent of its revenue coming from recurring customers over the last five years.

Weaknesses of Akums Drugs

• Cash outflow overhang: Akums Drugs had raised Rs 500 crore from private equity (PE) firm Ruby QC Investment in 2019. The deal allowed Ruby QC the option to sell its stake back to the company at a predetermined price. As a result, the company had a Rs 1,365 crore liability towards Ruby QC as of March 2024.
  The PE investor, which currently has a 20 per cent stake in Akums, is selling half of its stake through the IPO. It retains the right to sell the remaining 10 per cent stake either by selling it back to the company or through the open market after the stock's listing. In case the PE firm opts to sell the stake back to the company, Akums would need to pay around Rs 650-700 crore based on the latest valuation. It has set aside Rs 181 crore for this payment as of March 2024. Ruby QC can exercise its right to sell the remaining stake back to Akums between January 1, 2025 and July 31, 2025.
  
• Industry regulations: The pharma industry is highly regulated and any unfavourable observations or regulatory developments can severely impact the company's operations.

Risk report

Company and business

• Are Akums Drugs's earnings before tax more than Rs 50 crore in the last 12 months?
  No. The company reported a loss (before tax) of Rs 45 crore as of FY24.
  
• Will Akums Drugs be able to scale up its business?
  Yes. Its large manufacturing scale, domain expertise, and the positive growth trend in India's pharmaceutical market will enable the company to scale its business.
  
• Does Akums Drugs have a recognisable brand recall with client stickiness?
  Yes. Akums' client list includes multiple industry titans and the company has shown solid client retention in the past.
  
• Does the company have a credible moat?
  No. The company manufactures off-patent generic products, which have low-entry barriers and are exposed to an intense competitive environment.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters have over 25 per cent stake in the company?
  Yes. Post the IPO, the promoters will hold a 75.3 per cent stake.
  
• Do the top three managers have over 15 years of combined leadership at Akums Drugs?
  Yes. The company's co-founders and managing directors, Sanjeev Jain and Sandeep Jain, have been associated with the company since its incorporation in 2004.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information suggests otherwise.
  
• Is the company's accounting policy stable?
  Yes. No information suggests otherwise.
  
• Is Akums Drugs free of promoter pledging of shares?
  Yes. The company's promoters have not pledged any shares.

Financials

• Did Akums Drugs generate a current and three-year average ROE of more than 15 per cent and a ROCE of more than 18 per cent?
  No. Akums Drugs's three-year average ROE and ROCE were -8.8 and 3 per cent, respectively. The ROE and ROCE were nearly 0.11 and 3.4 per cent, respectively, in FY24.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. The company's operating cash flows were positive between FY22 and FY24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. Akums Drugs had a net debt-to-equity ratio of 0.4 as of March 2024.
  
• Is Akums Drugs free from reliance on huge working capital for day-to-day affairs?
  No. Pharma companies generally require high working capital and Akums Drugs is no exception. The company recorded a relatively high cash conversion cycle of 99 days in FY24.
  
• Can the company run its business without relying on external funding in the next three years?
  No. The company's obligation towards Ruby QC for its investment, and capex requirements for new manufacturing facilities may force it to rely on external funds to run its business smoothly.
  
• Is Akums Drugs free from meaningful contingent liabilities?
  Yes. The company was free from meaningful contingent liabilities as of March 2024.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers a negative operating earnings yield on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  No. The stock will trade at a P/E ratio of 13356 times compared to its peers' median P/E of 52 times.
  
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The stock is valued at a P/B ratio of 7.3 times compared to its peers' median P/B of 8.5 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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