Verdict: Good mark for Life  

Rs 1,514 cr IPO comprising:

• 70% fresh issue, to repay Rs. 800 cr to promoter Glenmark Pharma for acquisition of API business and Rs. 150 cr for capex
• 30% OFS by promoters (100% stake to reduce to 83%)

Effectively Rs. 1,250 cr from IPO will go to promoters.

IPO Date: Tue 27^th Jul to Thu 29^th Jul 2021

Price band: Rs. 695-720 per share

MCap (at upper band): Rs. 8,822 cr, implying 17% dilution

Listing Date: 6^th Aug 2021

Non-Commoditized API Developer and Manufacturer

Glenmark Life Sciences, wholly owned subsidiary of Glenmark Pharma and carved out from parent in 2019, manufactures high value complex APIs, with 2/3^rd revenue generated from regulated markets (US, EU, Canada, Japan, Australia). With a portfolio of 120 molecules, company develops 8-10 molecules each year and aims to continue doing so. The innovation-driven business owns 39 patents, with 41 pending applications, spending ~2.3% revenue on R&D and 13% employees in R&D. However, even after 3 years, 40% revenue is still derived from parent firm.

Interest Savings

Pursuant to business transfer agreement, company paid Rs. 34 cr and Rs. 87 cr interest in FY20 and FY21 respectively to Glenmark Pharma on outstanding purchase consideration. Post IPO, entire Rs. 800 cr of present outstanding from total Rs. 1,162 cr will be repaid, saving interest outgo and augmenting PBT, which stood at Rs. 471 cr in FY21.

High Margin B2B Business

Between FY18-21, revenue grew at 16% CAGR, while EBITDA growth was higher at 21% CAGR. FY21 revenue and EBITDA stood at Rs.1,885 cr and Rs. 592 cr respectively, leading to 31% EBITDA margin. Excluding the interest payment to parent, EBITDA would be 36%, indicating high yield business, due to presence in complex APIs. On a tiny equity of Rs. 21.6 cr (FV Rs. 2), EPS for FY21 stood at Rs. 32.6, with healthy RoCE of 33%. 

Capex Supports High Growth Visibility

Having achieved 85% utilization in FY21, company is undertaking brownfield expansion to increase 727 KL capacity by 30% to 927 KL by FY23, via Rs. 150 cr investment from fresh issue proceeds. It also plans to double capacity over the next 4-5 years, via a 800 KL greenfield plant, funded through internal accruals and debt (if needed). This provides high revenue growth visibility through (i) increasing market share in existing products (ii) new launches (iii) new focus areas like oncology, peptides (iii) growth in the higher-margin contract development and manufacturing operations (CDMO) business (over generic APIs), which is only 8% of current revenue.

Undemanding Valuation

PE multiple based on FY21 earnings is 22x and only 17x, based on FY22E earnings, which is quite undemanding, given EBITDA margins expected to rise to 36%, post-interest savings. Such healthy margin profile is supported by high revenue growth potential, making the company an attractive buy on comfortable valuation.

Opportunity through Glenmark Pharma? 

Post announcement of IPO price band, share price of Glenmark Pharma fell marginally by 2% as parent shareholder reservation quota in the IPO got merged with retail allocation (now at 35%, against 10% proposed in DRHP), which is just a technical factor and not concerning. Instead value unlocking of subsidiary will benefit Glenmark Pharma over the long term.

However, we advise direct exposure to Glenmark Life which eliminates the holding company discount ambiguity. 

Conclusion:

Lower interest outgo in the immediate future, makes IPO pricing inexpensive and attractive for listing gains.

Over the long term, presence in high-margin non-commoditized verticals and rising capacity keeps prospects bright.

Thus, company looks good both for listing gains as well as a portfolio play.

Grey Market Premium (GMP) of Glenmark Life: Grey Market Premium of Glenmark Life Sciences is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.