Eris Lifesciences is entering the primary market on Friday 16^th June 2017, with an offer for sale (OFS) of up to 2.89 crore equity shares of Re. 1 each by PE firm ChrysCapital (77% of OFS), promoters and other shareholders in the price band of Rs. 600 to Rs. 603 per share. Representing 21% of the post issue paid-up share capital, issue will raise Rs. 1,741 crore at the upper end and close on Tuesday, 20^th June. Listing is expected on 29^th June.

Ahmedabad based Eris Lifesciences is a branded generic selling pharma company, focusing on lifestyle related disorders in the high margin therapeutic areas of cardiovascular, anti-diabetics, vitamins, gastro-enterology and anti-infectives. With 1,500 marketing representatives, share of metros and class 1 towns is 77% of its total revenue of Rs. 725 crore. With strong brands (80 mother brand groups) having superior lifecycle profile (73% brands in high growth segment against 31% for Indian pharma market), product portfolio is tilted towards chronic side (66% against 34% for Indian pharma market) with high prescription share of specialists and super specialists (96% against 62% for Indian pharma market).

Company’s financials have been simply excellent, to say the least. Over 4 years between FY13-17, revenue has clocked 17% CAGR, while EBITDA and PAT 35% and 43% CAGR respectively. FY17 financials growth was partly supported by 2 acquisitions – Rs 77 crore buy of 75% in Kinedex Healthcare catering to mobility related disorders (Dec 2016) with annual turnover of Rs. 83 crore, and Rs. 38 crore buy of Amay Pharma’s 40 brands and ApricaPharma focussed on cardiovascular and anti-diabetics segments (July 2016) clocking Rs. 19 crore in FY17 sales. 

While FY17 revenue grew 21% YoY to Rs. 725 crore, EBITDA jumped 65% to Rs. 288 crore, as margin strengthened a whopping 1,040 basis point (yes 10.40%!) to 39.7% from FY16’s 29.3% on account of lower input costs (200 bps) and operational leverage kicking-in. Being debt free, there is hardly any interest outgo, with PBT of Rs. 264 crore, up 71% in FY17 and PAT at Rs. 241 crore, up 79% YoY, leading to an EPS of Rs. 17.61. Pursuant to Sept 2016 99:1 bonus issue and stock split from face value 10 to 1, current equity is still low at Rs. 13.75 crore.

While the company’s growth since its inception 10 years ago is marvellous, what is commendable is that it did not require any external funding to fuel the same. The PE transaction in Aug 2011 (which is exiting via the OFS) was a secondary sale by promoters. Creating a Rs. 8,000 crore plus company from scratch is no mean feat! PE firm ChrysCapital, holding 16.25% stake since 7 years, at effective cost of Rs. 87 per share, will make a complete exit, at an IRR of 39%.

As as 31-3-17, on net worth of Rs. 540 crore, company has a debt free balance sheet. Surplus cash and equivalents are Rs. 261 crore, translating into cash per share of Rs. 19. Currently, company has only 9 shareholders – 5 promoters with combined holding of 59.18%, whose stake, post IPO will shrink to 55.93%. Besides ChrysCapital’s 16.25%, 3 individuals own 24.57%, who will own 23.07% post IPO.

At Rs. 603 per share, company’s market cap will be Rs. 8,291 crore and EV Rs. 8,031 crore, which discounts historic FY17 earnings by EV/EBITDA and PE multiples of 28x and 34x respectively. Factoring in 20% growth for FY18, the upper end of the price band leads to EV/EBITDA multiple of 23x and PE multiple of 28x, which is slightly on the higher side. However, given the unique opportunity, the pricing appears reasonable, as peers are either delivering high growth but earning lower margins, or some are facing severe headwinds on their exports business. 

Rarely one comes across business delivering 49% RoCE and 45% RoE, which is definitely unheard of in the pharma sector. Since Eris earns zero revenue from exports, it is immune from US FDA issues plaguing Indian pharma currently. This is a big distinguishing factor vis-à-vis peers. Moreover, it enjoys tax break (under Income Tax Act, which will continue post GST) till FY24 on its sole manufacturing facility at Guwahati, Assam, which accounts for 78% of sales. Balance 22% of sales is outsourced to contract manufacturers. Hence, effective tax rate for company was very low at 8.3% in FY17 and 12.7% in FY16.

Very strong fundamentals, expected healthy growth, cash rich status, no US FDA overhangs make this issue an ‘apply’, despite uneconomical pricing.

Disclosure: No Interest.