IPO: Valiant Laboratories

Valiant Laboratories, an active pharmaceutical ingredient (API) manufacturer, has launched its IPO (initial public offering). Here's a breakdown of the company's strengths, weaknesses and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : The three-year average ROE and ROCE of Valiant Laboratories are 38.7 and 43.1 per cent, respectively. It also reported positive cash flow from operations in the last three financial years.
  
• Growth : Revenue and net profit have grown by 35.3 and -2.6 per cent per annum over FY 21-23.
  
• Valuation : The stock will be priced at a P/E and P/B of 21 and 2.4 times respectively, compared to its peers' median P/E and average P/B of 47.8 and 6.2 times, respectively.
  
• Overview : The company plans to expand its product portfolio into specialty chemicals through its subsidiary Valiant Advanced Sciences. The money is being raised for the construction and working capital requirement of the proposed facility for Valiant Advanced Sciences. They plan to use some of the products for backward integration as well as for B2B business.

About Valiant Laboratories

Valiant Laboratories, a part of the Valiant group, specialises in the production of active pharmaceutical ingredients (APIs) and bulk drugs with a primary focus on the manufacture of Paracetamol. At present, they are operating through their only manufacturing plant in Palghar, Maharashtra with an in-house R&D facility.

Strengths

• Decent returns: The three-year average ROCE and ROE of Valiant Laboratories are 43.1 and 38.7 per cent, respectively.

Weaknesses

• Being a single-product manufacturer in the paracetamol API industry, any industry shifts or changes in product demand could severely impact the company's revenue and profitability.
  
• The company might face raw material supply challenges , as top three foreign suppliers are responsible for about 75 per cent of raw materials, making them vulnerable to cost fluctuations, operational interruptions, and production losses.
  
• Revenue concentration : Top five customers contributed about 30 per cent to revenue in FY23.

Risk report

Company and business

• Are earnings before tax of Valiant Laboratories more than Rs 50 crore in the last 12 months?
  No. The company's profit before tax for FY23 was Rs 38 crore.
• Will Valiant Laboratories be able to scale up its business?
  Yes. The company is in the process of diversifying its product portfolio through its subsidiary for other specialty chemicals.
• Do Valiant Laboratories have recognisable brands with client stickiness?
  No. The company doesn't have any long-term contracts with their clients.
• Does the company have a credible moat?
  No. Despite a healthy ROCE, the company doesn't have a credible moat as it battles with much larger and cost-efficient companies.

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. Post-IPO, the promoters' stake will be 74.9 per cent.
• Do the top three managers have more than 15 years of combined leadership at Valiant Laboratories?
  Yes. Key managerial personnel and senior management do have more than 15 years of experience.
• 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 Valiant Laboratories 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 38.7 and 43.1 per cent, respectively. In FY23, the company's ROE and ROCE were 33.7 and 22.8 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flows from operations in each of the last three years.
• 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 0.26 times.
• Is Valiant Laboratories free from reliance on huge working capital for day-to-day affairs?
  No. The company's business affairs are working capital intensive.
• Can the company run its business without relying on external funding in the next three years?
  Yes. While the company has some debt on its balance sheet, the proceeds from the IPO will help fund its business expansion.
• Is Valiant Laboratories free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of total equity stood at around 0.4 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 5.3 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 21 times compared to peers' median level of 47.8 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company will trade at a price-to-book ratio of 2.4 times compared to peers' average of 6.2 times.

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

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