Low operational costs, the China +1 strategy and the government's focus on local manufacturing are some tailwinds for the company
06-Oct-2021 •Danish Khanna
Glenmark Life Sciences came out with its IPO about 10 weeks ago. Value Research's analysis of the IPO can be found here. This follow-up article focuses on the IPO's performance, post-IPO events and changes in its valuation since then.
Our analysis of the IPO
Glenmark Life Sciences is involved in manufacturing high-end active pharmaceutical ingredients (APIs), which are the key raw materials used to make drugs for various ailments. The company has a portfolio of 120 products with the market size of over $142 billion. This segment accounted for 92 per cent of its total revenues in FY21, while the rest came from the contract development and manufacturing operations (CDMO) business under which, it researches and develops compounds on a contractual basis as per clients' requirements.
Glenmark Life Sciences was spun off as a new company from its parent company Glenmark Pharma at a consideration price of Rs 1,162 crore in 2019. Now in July 2021, the company came up with an IPO for Rs 1514 crore. Out of the IPO proceeds, Rs 800 crore was paid for the outstanding purchase consideration for the spin-off to its parent company and the rest was used for the company's capex plans.
We gave a score of 18 out of 27 based on our IPO analysis, as the company holds more than 30 per cent market share in some of its key products, together contributing 44 per cent to its total API business. However, the company is largely dependent on its parent company, which accounts for 40 per cent of its revenue.
Our rating of the company was based on the following:
Stock performance since listing
The company saw a good response to its IPO, which was oversubscribed by more than 44 times. The qualified institutional buyers (QIB) portion was oversubscribed by 37 times, while the non-institutional investors' portion poured in large numbers, oversubscribing by 123 times and the retail portion by 15 times.
Although the company's IPO witnessed a good response from investors, the stock had a quiet debut at the stock exchanges. The stock was listed at a premium of just over 4 per cent. Since its listing, the stock has been on a downward trajectory, despite the bull run in the broader markets. Post listing, the stock has been down by over 10 per cent, while the Sensex has increased by around 10 per cent.
Since its inception, the company has more than doubled its revenue from Rs 886 crore in FY19 to Rs 1,885 crore in FY21. In the last three years, its operating margins have stood over 30 per cent and return on capital has averaged at 32 per cent. In its first quarterly result post listing on the exchanges, the company's revenue was up by 32 per cent YoY (and 12.5 per cent QoQ), driven by higher API sales (up 38 per cent YoY). However, the CDMO business declined 11 per cent, owing to the phasing of customers orders during the quarter.
However, the EBITDA margin declined 4.15 per cent YoY on the back of an increase in the costs of raw materials and lower contribution from the CDMO business. The management has guided the topline growth of 16-18 per cent in FY22.
What to do now?
India imports around 68 per cent of APIs from China. However, in a bid to promote local manufacturing and cut this dependence, the government has announced various schemes and financial packages for companies belonging to this sector. This, along with the availability of skilled manpower, low operational costs and increased government's focus on the sector, can act as growth catalysts for this sector.
The company works with 16 of the top 20 global generic-pharma companies and the increasing demand for the China +1 strategy is likely to be highly beneficial for the company. Also, it plans to expand its API capacity by 28 per cent from the IPO proceeds, which will also increase its revenues in the future.
However, the company has a working-capital cycle of more than six months. As of FY21, around 10.2 per cent of its receivables were pending for more than 180 days. But, with a P/E ratio of 23.5 times, the company is just too good to ignore.