IPO: Concord Biotech

In a nutshell

• Quality : Its three-year average return on equity (ROE) and return on capital employed (ROCE) are 21.1 and 24.5 per cent, respectively. Moreover, it generated positive cash flow from operations in each of the last three financial years.
  
• Growth : Its topline grew 19.7 per cent and 15.6 per cent in FY23 and FY22, respectively, driven by higher API sales. The growing demand for fermentation-based APIs in immunosuppressants and oncology should drive growth.
  
• Valuation : The stock will be priced at a P/E and P/B of 32.3 and 6.0 times, respectively, as compared to its peer's median and average of 32.6 and 5.3 times, respectively.
  
• Overview : The rising demand for immunosuppressants and oncology drugs should help it grow. However, high competitive intensity and regulatory hiccups pose a significant threat.

About Concord Biotech

Concord Biotech (incorporated in 1984) is a leading manufacturer of fermentation-based APIs used in therapeutic areas like immunosuppressants, oncology, anti-infectives and nephrology drugs. Apart from APIs, it also sells formulations (11 per cent of FY23 revenue).

Strengths of Concord Biotech

• Its market share in certain fermentation-based APIs stood at over 20 per cent (by volume) as of December 2022.
  
• It has maintained long-standing relationships with its top 10 clients (an average of eight years as of FY23).

Weaknesses of Concord Biotech

• High dependency on China for raw materials (around 32 per cent in FY23).
  
• Operates in a highly regulated industry .
  
• Revenue concentration: Top 10 customers accounted for about 44 per cent of FY23 revenue. Thus, the topline will be significantly impacted if a top client jumps ship.

Risk report

Company and business

• Are Concord Biotech's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. The company's profit before tax for FY23 was Rs 322 crore.
• Will Concord Biotech be able to scale up its business?
  Yes. Leadership in certain APIs and strong growth prospects for immunosuppressants and oncology drugs should help it scale up.
• Does Concord Biotech have recognisable brands with client stickiness?
  Yes. Its average relationship of eight years (as of FY23) with its top ten customers (by revenue) is a testament to its client stickiness.
• Does the company have a credible moat?
  No. It faces competition from domestic as well as international players.

Management

• 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. Promoter's stake will be 44.1 per cent post IPO.
• Do the top three managers have more than 15 years of combined leadership at Concord Biotech?
  Yes. Sudhir Vaid (Chairman and MD) has been associated with the company since its incorporation in 1984.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is Concord Biotech 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 more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. The company's three-year average ROE and ROCE are 21.1 and 24.5 per cent, respectively. In FY23, the company's ROE and ROCE were 20.1 and 24.3 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. Cash flow from operations stood at Rs 246 crore, Rs 207 crore and Rs 167 crore in FY23, FY22 and FY21, respectively.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's net debt-to-equity ratio, as of March 2023, is -0.01 times, i.e., a net cash position.
• Is Concord Biotech free from reliance on huge working capital for day-to-day affairs?
  No. It requires significant working capital due to high working capital days (229 days in FY23).
• Can the company run its business without relying on external funding in the next three years?
  Yes. It has generated free cash flows during FY23 and FY22. Moreover, its recent capacity expansion means it won't be expanding any time soon.
• Is Concord Biotech free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of equity is 1 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 3.7 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  Yes. The company will trade at a price-to-earnings ratio of 32.3 times compared to peers' median level of 32.6 times.
• Is the stock's price-to-book value less than its peers' average level?
  No. The company will trade at a price-to-book ratio of 6.0 times compared to peers' average of 5.3 times.

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

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