Akums Drugs

By Geetanjali Kedia

about 4 months ago

IPO Size: Rs. 1,857 cr

Fresh Issue of Rs. 680 cr for (i) Rs. 387 cr debt repayment of Rs. 491 cr gross debt (ii) Rs. 55 cr working capital
Offer For Sale (OFS) of Rs. 1,177 cr by PE Quadria Capital (15% to reduce to 5%) and promoter (85% stake to drop to 75%)

Price band: Rs. 646-679 per share

75% reserved for institutions and only 10% retail, as accounting loss in FY22

M cap: Rs. 10,685 cr, implying 17% dilution

IPO Date: Tue 30^th Jul to Thu 1^st Aug 2024, Listing Tue 6^th Aug 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Pharmaceutical CDMO Company

Akums Drugs is a 20 year old pharmaceutical contract development and manufacturing organization (CDMO) having 12 manufacturing plants in North India. With just Rs. 3,300 cr topline from CDMO business (Rs. 4,200 cr overall company revenue), it enjoys 30% market share of the Indian domestic CDMO market by value.

Reported Profits Adjusted for Notional Loss

Revenue rose at 15% CAGR from Rs. 2,723 cr in FY21 to Rs. 4,178 cr in FY24, supported by capex of Rs. 980 cr in past 4 years. Adjusted EBITDA rose at a faster pace of 18% CAGR to Rs. 515 cr in FY24, translating into 12% EBITDA margin. EBITDA is adjusted for Rs. 358 cr notional loss on PE investor’s put option, with reported EBITDA only at Rs. 131 cr in FY24. Over the years, cumulative notional loss has been at Rs. 1,365 cr, which will not occur from 29^th May 2024, post surrender of the put option.

Seasonality in Profits

Given the nature of products, Akums’ H1 profit margins are much higher than H2. H1FY24 adjusted EBITDA was at Rs. 295 cr and Rs. 220 cr in H2FY24, despite topline being similar at Rs. 2,151 cr and Rs. 2,027 cr respectively. Thus adjusted EBITDA margin was 14% and 10% for H1 and H2 respectively which reflected sharp seasonality, unlike peers. Company’s half-yearly margins need to be monitored going forward.

FY25E PAT to be Lower YoY

FY24 adjusted PAT stood at Rs. 359 cr, including gain of Rs. 120 cr on deferred tax reversal. Thus valuing company on FY24 profit will be inappropriate.

Going forward, interest cost of Rs. 51 cr will reduce due to debt repayment and effective tax rate will be at 19-20%, due to Rs. 460 cr unabsorbed deferred tax benefit. FY25E adjusted PAT is estimated at closer to Rs. 300 cr, lower than FY24’s Rs.359 cr, implying a net margin of ~6% and 12% RoE. FY24 adjusted RoE was higher at 17% due to deferred tax reversal, but steady-state RoE will be at 13-14% FY26E onwards.

Aggressively Priced

Based on FY25E PAT of Rs. 300 cr, current year PE multiple is at 33x. Estimating 15% topline growth for FY26E and an optimistic 7% net margin, FY26E EPS of Rs. 25 leads to a PE multiple of 27.6x on a one year forward basis.

Comparison with Divi’s, Torrent, Mankind, JB Chemicals, Eris Life, Alkem as made in the RHP is not an apple-to-apple comparison. Instead, pure-play listed CDMO players are Innova Captab, Glenmark Life, Windlas Biotech, which are all ruling between PE multiples of 20-21x, on FY26E basis:

Akums’ fixed asset turnover ratio of 3.3-3.5x is lower than Innova Captab’s 5x. Latter’s net margin of 9% in FY24 is higher, besides Innova having doubled capacity. Innova Captab’s share price is up 23% in past 2 weeks and is yet ruling at FY26E PE of 20x despite 20+% RoE.
Glenmark Life with Rs. 2,300 cr topline, 20% net margin and 21% RoE is trading at a PE of only 20x
Smaller peer Windlass Biotech with Rs. 630 cr topline, higher net margin of 9% and comparable RoE of 14% is ruling at one year forward PE multiple of 21x.

Thus, Akums’ PE of over 27x pricing is on the higher side. Anyways, company’s fair value for put option liability was at Rs. 9,050 cr as of 31.3.24. Pre-money IPO valuation is now a Rs. 10,005 cr, i.e. 10.6% higher in 4 months and ‘more than fair’.