Laxmi Dental IPO analysis

Laxmi Dental IPO (initial public offering) will open for subscription on January 13, 2025, and close on January 15, 2025. We break down the dental product company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

Laxmi Dental IPO in a nutshell

• Quality : Between FY22 and FY24, the company reported a three-year average ROE and ROCE of nearly -9 and 4 per cent, respectively.
  
• Growth : Between FY22 and FY24, its revenue and profit after tax grew by 83 and almost 19 per cent per annum, respectively.
  
• Valuation : At the upper end of the price band, the stock is valued at a P/E and a P/B ratio of nearly 95 and 12 times, respectively.
  
• Overview: Rising healthcare expenditure, growing awareness of oral health and a high prevalence of dental disorders in India will benefit Laxmi Dental. The company's growth prospects are further supported by untapped rural markets, government initiatives promoting dental tourism, and increasing demand for cosmetic treatments like clear aligners. Additionally, advancements in technology and the expansion of dental clinics present significant opportunities. However, intense competition in the dental healthcare market will require the company to innovate and differentiate its offerings to secure a strong competitive edge.

About Laxmi Dental

Incorporated in 2004, Laxmi Dental manufactures and distributes a diverse range of dental products and services. The company operates through subsidiaries in India, the US, and other global markets.

Laxmi Dental has the below key business segments:

• Laboratory: Contributing 63 per cent to the revenue, this segment involves manufacturing and supplying of dental prosthetics such as crowns, bridges, dentures, and veneers.
  
• Aligners: Contributing 31 per cent to the revenue for the six months ending September 30, 2024, this segment focuses on modern orthodontic solutions, such as clear aligners for addressing malocclusion and other dental issues.
  
• Other: Contributing 6 per cent to revenue for the six months ending September 30, 2024, this includes dental equipment maintenance, training programs, software solutions, and consulting for clinic setups.

Geographically, India and the US contributed 67 per cent and 19 per cent to the revenue, while other regions contributed 14 per cent.

Strengths of Laxmi Dental

• Growing aligner business: Contribution from the aligner segment to the revenue rose from 17.5 per cent in FY22 to 31 per cent in H1 FY25. Being the only aligner company in India with vertical integration enables complete production, significant supply chain control, and cost efficiency, which is also reflected in improved margins.
  
• Market leadership: Laxmi Dental is India's second-largest player in the domestic dental laboratory business and a leading exporter of dental laboratory products, with operations in 95 countries. Its extensive network encompasses over 22,000 members comprising dentists, clinics, and dental companies.

Weaknesses of Laxmi Dental

• Concentration risk: Laxmi Dental relies on a limited number of suppliers, with the top five suppliers accounting for 90 per cent of raw material purchases. The absence of long-term supply contracts heightens exposure to price fluctuations, supply chain disruptions, and potential production delays.
  
• History of bad capital allocation: The company has a history of suboptimal capital allocation, as seen in its earlier attempt to expand into the US market through its subsidiary, Laxmi Dental Lab USA Inc., which incurred significant losses and a business division was also later sold as part of discontinued operations . Along with this, other subsidiaries and aggressive investments had resulted in the company incurring losses on a consolidated level, making it suffer for a few years.

Risk report

Company and business

• Are earnings before tax of Laxmi Dental more than Rs 50 crore in the last 12 months?
  No. The company reported a profit before tax of Rs 8.4 crore in FY24.
  
• Will Laxmi Dental be able to scale up its business?
  Yes. The growing focus on dental health and rising awareness of dental aesthetics, such as alignment, will help drive the company's growth.
  
• Does Laxmi Dental have recognisable brands with client stickiness?
  No. The company usually operates as a B2B2C (business-to-business-to-consumer) business model with no long-term agreement with its clients.
  
• Does the company have a credible moat?
  No. It operates in an industry with many organised players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. After the IPO, its promoter will hold a 42.7 per cent stake in the company.
  
• Do the top three managers have more than 15 years of combined leadership at Laxmi Dental?
  Yes. Chairperson and whole-time director Rajesh Khakhar, and MD and CEO Sameer Merchant have been associated with the company since its incorporation in July 2004.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Laxmi Dental free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of over 15 per cent and a return on capital employed of over 18 per cent?
  No. Its three-year average ROE and ROCE were nearly -9 and 4 per cent, respectively. In FY24, its ROE and ROCE were 82 and 14 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  No. The company reported negative cash flow in FY22.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company has a net debt-to-equity of around 0.7 as of September 2024.
  
• Is Laxmi Dental free from reliance on huge working capital for day-to-day affairs?
  No. The company's business is working capital intensive.
  
• Can the company run its business without relying on external funding in the next three years?
  No. The business will need to rely on external funding for growth and working capital requirements. The majority of the capital raised from the IPO will be used for capex and loan prepayment. With working capital days of 60 and a negative free cash flow to firm (FCFF) of Rs 11 crore, the company will need to rely on short-term debt.
  
• Is Laxmi Dental free from meaningful contingent liabilities?
  Yes. As of Q2 FY25, contingent liabilities were less than 5 per cent of its total equity.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 0.5 per cent on its enterprise value.
  
• Is the stock's price-to-earnings (P/E) less than its peers' median level?
  No. The stock is valued at a P/E of 95 times, same as the industry's median level.
  
• Is the stock's price-to-book (P/B) value less than its peers' average level?
  No. The stock is valued at a P/B ratio of over 11.5 times, compared to its peers' average level of 10.8 times.

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Disclaimer: This story is not a stock recommendation. Investors should do their due diligence before investing.

Also read: Should you invest in IPOs?