Update 3: IPO withdrawn by the company, as institutional portion under-susbcribed. 

Update 2: Issue closing date further extended to 22nd November. This time, price band has been lowered to Rs. 68-76 per share. Our view on the issue remians unchanged. 

Update: Due to poor subscription of only 26% on an overall basis (nil subscription in the institutional category), the issue closing has been extended to 17th November. Price band remains unchanged. Our view remians intact in the issue. 

By Geetanjali Kedia

Greensignal Bio Pharma has entered the primary market on Wednesday, 9th November 2016, with an offer for sale (OFS) of upto 1.45 crore equity shares of Rs. 10 each, in the price band of Rs. 76 to Rs. 80 per share. 84% of the OFS comprises promoter selling while balance 16% is from 2 shareholders, one of which is Avon Cycles. Representing 38% of the post issue paid-up capital, issue will raise Rs. 111-117 crore at the lower and upper price band respectively and will close on Friday 11th November, 2016.

Greensignal Bio Pharma is a Chennai based vaccine maker, with a portfolio of just 2 vaccines – BCG vaccine for immunisation against tuberculosis and BCG-ONCO for immunotherapy for treating urinary bladder carcinoma under the brand Urovac. Being WHO-prequalified (one in 4 companies globally) for supply of BCG vaccine to UNICEF and Ministry of Health, India (MoH), BCG vaccine accounts for 90-95% of company revenue. Company’s distribution agreement for BCG-ONCO vaccine with Cadila Health expired in June 2016, but no renewal or other arrangement were undertaken. Thus, it is essentially a sole product company, which poses a high risk.

BCG vaccine in India has price ceiling of Rs. 5.58 per dose, as per Sep 2014 Govt. notification. To combat this, company has ventured into overseas markets from FY15, since when its financial fortunes have improved. Exports, accounting for 46% of FY16 sales and 66% of Q1FY17 sales, are to 17 countries like Lebanon, Saudi Arabia, Turkey, Switzerland, Nepal, Indonesia, either directly through UNICEF or indirectly, through supply and distribution arrangements. Company’s major clients, UNICEF and MoH, together constituted 64% and 47% of FY16 and Q1FY17 revenues respectively.

Company’s has a single manufacturing unit in Tamil Nadu, with capacity of 1.08 crore vials, while only 52.52 lakh vials were produced in FY16, resulting in sub-50% utilisation levels. In addition, it has purchased 34 acres of land for Rs. 3 crore for future development. However, when existing capacity is not utilized optimally, due to lack of sales, futile to plan future growth, way too much in advance. 

Being a relatively new company, it does not have a long operating history. Till FY15, it has consistently reported losses – net loss of Rs. 0.50 crore in FY12 and FY13, loss of Rs. 1.3 crore in FY14, loss of Rs. 0.21 crore in FY15, on topline ranging between Rs. 4 crore to Rs. 12 crore. FY14 and FY15 saw decline in domestic vaccine sales, as company was not the lowest bidder in MoH tenders coupled with lower quantity ordered by Cadila Healthcare. However, FY16 domestic revenue increased thanks to MoH order wins, earning PAT of Rs. 5.31 crore on income of Rs. 20.50 crore, with net margin of 25.9% and EPS of Rs. 1.45 for FY16 (adjusted for 3:2 bonus declared in May 2016).

For Q1FY17, thanks to higher exports, company achieved 50% of full FY16 financial performance in the first quarter itself, clocking income of Rs. 10.2 crore and PAT of Rs. 2.93 crore, yielding EPS of Rs. 0.76 for Q1 alone. As of 30-6-16, company had total debt of Rs. 3.88 crore and cash/bank balance of Rs. 2.86 crore, resulting in net debt of barely Rs. 1.02 crore. Thus, is it a virtually debt free company on networth (adjusted) of Rs. 48 crore and BVPS Rs. 12.4. Promoter holding, currently at 83.55%, to shrink to 51.79% post offer. Selling shareholders will continue to hold 10% post OFS.

At the upper end of the price band, company will have market cap of Rs. 307 crore and EV of Rs. 308 crore, implying EV/EBITDA multiple of 35x and 19x and PE multiple of 58x and 27x based on FY16 (historic) and Q1FY17 annualised (current year) estimates, respectively. PE multiple of 27 times is not cheap for a stock having such high dependence on a sole product and annual topline of less than Rs. 40 crore. Besides small scale of operations and lack of monopoly, virtual single product profile without any pricing power in the domestic market, as product is not patented (on the contrary facing price ceiling) is another grave risk.

Listed vaccine maker Panacea Biotech, having a portfolio of 4 vaccines along with branded pharmaceutical formulations, has market cap of Rs. 700 crore on annual income of Rs. 650 crore. However, its R&D segment being loss making, company availed CDR and hence is not a true comparable to Greensignal. On a broader level, pharma stocks are currently ruling soft, due to macro headwinds and domestic jitters facing the stock markets.

Lean balance sheet position, order book of Rs. 54 crore for FY17 and FY18, representing 2.7x of FY16 income, and potential to scale up export revenues are some of the positives. However, it is better to wait for a few more quarters to gauge the sustainability in financial turnaround along with the future prospects of this company.

For now, the IPO can be skipped.

Disclosure: No Interest.