Supriya Lifescience IPO: How good is it?

In our story, Supriya Lifescience IPO: Information analysis, we have shared the key details of the IPO, along with important information about the company. Here we will answer some questions about Supriya Lifescience and evaluate it on parameters like management, financials, valuations, etc.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
Yes. The company's earnings before tax stood at Rs 167 crore for FY21.

2) Will the company be able to scale up its business?
Yes. The company has planned to utilise a part of the proceeds for capital expenditure and it has already acquired a plot of land for it. So, it would be able to scale up its business in the coming years.

3) Does the company have recognisable brands truly valued by its customers?
Yes. Even though brand recognition does not hold much significance in the B2B segment, the company's leadership position in several APIs and strong global presence have helped it gain a reputation among various players.

4) Does the company have high repeat customer usage?
Yes. The company has been associated with three companies for more than nine years and with seven companies for more than four years.

5) Does the company have a credible moat?
Yes. Owing to the backward integration in its 12 APIs, the company is able t0 maintain cost leadership in those products. It also derives a significant portion of revenue from those APIs.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
No. The company has huge exposure to the international market for both raw materials and sales. Any adverse change in geopolitical conditions can affect the business.

7) Is the business of the company immune from easy replication by new players?
Yes. Thanks to backward integration, the company enjoys cost leadership, efficiency and relationship with customers and all these ultimately give it a competitive edge.

8) Is the company's product able to withstand being easily substituted or outdated?
Yes. The company's products are important components in various therapeutic segments and there is a consistent increase in the demand for these products.

9) Are the customers of the company devoid of significant bargaining power?
No. The company earns a significant portion of its revenue from the top three and the top ten customers. It also doesn't have any long-term contracts with these customers. So, any change in terms may affect the business in an adverse way.

10) Are the suppliers of the company devoid of significant bargaining power?
Yes. The company gets its raw materials from various suppliers which resulted in a diversified supplier base. As the company is also backward integrated with some APIs from which it derives a major portion of its revenue, it doesn't rely on suppliers much.

11) Is the level of competition the company faces relatively low?
No. The Indian pharmaceutical industry is heavily crowded with various small and large players.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. Post-IPO, the promoter and promoter group will hold about a 68.2 per cent stake in the company.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. Its chairman and managing director Satish Wagh (one of the promoters) has been associated with the company since its incorporation in 2008 (over 13 years) and the CFO has been associated with the company for the past two years.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes, the company is free from any material litigation.

16) Is the company's accounting policy stable?
Yes. As per the auditors' report, the accounting policy is stable.

17) Is the company free of promoter pledging of its shares?
Yes. The company's shares are free of any pledging.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and return on capital employed of more than 18 per cent?
Yes, the company's three-year (FY19-21) average return on equity was 45.8 per cent and a return on capital employed of 48.8 per cent. For FY21, the company generated a return on equity of 46.0 per cent and a return on capital employed of 60.1 per cent.

19) Was the company's operating cash flow positive during the last three years?
Yes, the company reported positive operating cash flow during the last three years.

20) Did the company increase its revenue by 10 per cent CAGR in the last three years?
Yes. The company's revenue increased from Rs 277.8 crore in FY19 to Rs 385.4 crore in FY21 at a CAGR of 17.8 per cent.

21) Is the company's net debt-to-equity ratio less than one or is its interest-coverage ratio more than two?
Yes. As of FY21, the company's interest-coverage ratio stood at 42.0.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
Yes. The company has a strong cash position and its operations do not require huge working capital. Its working-capital days stood at 32 days for FY21.

23) Can the company run its business without relying on external funding in the next three years?
Yes. With low capital requirements and high operating leverage, the business generates strong free cash flows. Moreover, the company will use a portion of the IPO proceeds to fund its capital expenditure.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. The company's short-term borrowings have remained stable. It was Rs 77.2 crore in FY19 and as on September 30, 2021, short-term borrowings were Rs 71 crore.

25) Is the company free from meaningful contingent liabilities?
Yes. The company is free from meaningful contingent liabilities.

Stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No, the stock will offer an operating-earnings yield of 7.8 per cent on its enterprise value.

27) Is the stock's price-to-earnings less than its peers' median level?
Yes. Post-IPO, the company's stock will trade at a P/E of around 17.8, which is less than its peers' median P/E of 26.2.

28) Is the stock's price-to-book value less than its peers' average level?
Yes. Post-IPO, the company's stock will trade at a P/B of around 4.1, which is less than its peers' average P/B of 4.8.

Also read about Supriya Lifesciences IPO: Information analysis to learn about the key IPO details and important information about the company.

Disclaimer: The authors may be an applicant in this Initial Public Offering