IPO Size: Rs.1,952 cr 

• Rs. 1,152 cr is Offer For Sale (OFS) mainly by PE investor Bain Capital (13% to drop to 9%), and by the promoters (83% to reduce to 78%)
• Rs. 800 cr Fresh Issue for debt repayment of Rs. 600 cr, of Rs. 1,555 cr net debt

Price band: Rs. 960-1,008 per share

M cap: Rs. 19,060 cr, implying 10% dilution

IPO Date: Wed 3^rd Jul to Fri 5^th Jul 2024, Listing Wed 10^th Jul 2024

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

India’s 13^th Largest Pharma Company

Emcure Pharmaceuticals is the leader in Indian gynecology and HIV anti-viral therapeutic market, with 13.5% market share in gynecology. Revenue is equally split between India and international markets, comprising Canada, Europe, Africa among others. Domestic therapeutical mix comprised 24% gynecology, 16% cardiovascular, 11% anti-infectives, 9% vitamins minerals nutrients, 7% HIV antivirals.

Exports Rise, but Domestic Business Stagnate

FY24 revenue grew 11% YoY to Rs.6,658 cr, with exports up 23% YoY to Rs. 3,460 cr, supported by Rs. 1,149 cr capex undertaken to add manufacturing capacity across 4 plants. However, domestic business, accounting for half the revenue, stagnated at Rs. 3,200 cr during FY22 to FY24.

Multiple Factors Impact Margin

EBITDA contracted from Rs. 1,394 cr in FY22 to Rs. 1,286 cr in FY24, with EBITDA margin dropping from FY22’s 24% to 19% in FY24, due to the following reasons.

• Higher-margin branded generics sales have remained flat at Rs. 3,400 cr between FY22 to FY24. Only generic products, clock lower margin vis-à-vis branded generics, has grown from Rs. 1,760 cr in FY22 to Rs. 2,600 cr in FY24.
• Expired inventory is as high as Rs. 138 cr or 2% of revenue. This not only causes loss of revenue but also adversely impacts profit.  
• To increase doctor reach, company has added 1,000 marketing representatives and has 5,000+ field force, with aim to increase domestic business over the next 2 years.

Despite 63% gross margin, company’s net margin is just at 8%. Export business requires high working capital, with outstanding inventory and debtors, as high as 2.8 months and 3.3 months respectively. This implies receivables are slow moving, as only 50% of revenue is from international market.

Lowest Margin among Peers

At 19%, Emcure has the lowest EBITDA margin among large pharma companies - Dr Reddy 30%, Cipla 26%, Torrent 33%, Mankind 26%, Abbott 28%, JB Chemicals 27%, Aurobindo 21%. Even with cost optimization efforts in future, it is likely to remain in the lower end. Moreover, all the above peers have reported bottomline growth between FY22 to FY24, whereas Emcure’s PAT dropped from Rs. 702 cr in FY22 to Rs. 528 cr in FY24.

Fairly Valued

While FY24 EPS stood at Rs. 28, company guides 20% EBITDA margin for FY25E, leading to an EPS of Rs. 37 and resultant PE multiple of 27x, on current year basis. This is fair considering 17-18% RoE, lack of new drug launches to provide strong growth visibility and on peer comparison. Export focused Aurobindo Pharma, with growing topline and double-digit net margin is ruling at a PE multiple of 21x, while domestic focused Alkem Lab, with 19% EBITDA margin, 14% PAT margin and 19% RoE is ruling at a PE multiple of 30x.

This is Emcure’s 2^nd filing for IPO (first in 2021) wile part-exiting investor is making just 14% IRR, equivalent to Nifty 10 return, on its 10 year long investment. Low free float of ~10% post listing, with less than 19 cr outstanding equity shares can be a trigger for share price, but it is not a good enough ground for investment.

US Risk not Entirely Covered?

In 2016, company faced US FDA issues and demerged that business to group company Avet Lifesciences in 2021. Presently, some civil proceedings are still ongoing. While management says the issue is behind it, under the indemnity agreement, if Avet Lifesciences is unable to meet future liability, it may fall back on the company. This can be a big haunt from the past.