Verdict: Just Not Recommended

Rs. 402 cr IPO:

• 60% is OFS by promoter (1/4^th) and PE Tano Capital (3/4^th) selling its entire 22% stake
• Rs. 165 cr fresh issue for capex (50cr), working cap (48cr), debt re-payment (20cr)

IPO Date: Wed 4^th Aug to Fri 6^th Aug 2021

Price band: Rs.448-460 per share

Mcap: Rs. 1,003 cr, implying 40% dilution

Listing: 17^th Aug 2021

Dehradun based Pharma Formulation CDMO

Company is India’s 5^th largest CDMO player, but its market share is less than 2% in the Rs. 20,000 cr, competitive and highly fragmented market, comprising 400 organised and 15,000 unorganised players. 87% of FY21’s Rs. 427 cr revenue is derived from Contract Development and Manufacturing Organisation (CDMO) activities, with balance from domestic trade generics and OTC brands (10%) and exports (5%). While company provides development services to other pharma giants, its own R&D spend is only 0.8% of revenue, and declining in past 2 years, instead of rising!

Fresh Issue to Fund Capex

Company’s current utilization on installed capacity of 7,064 million tablets, 54.46 million sachet and 61 million liquid bottles is barely 40%, but it is undertaking Rs. 57 cr capex, primarily to foray into higher-margin injectibles space. However, it is too early to price in the positives, as scale up of new business will be gradual. 

Red Flags

• For Rs. 57 cr capex, some second hand machinery is planned to be purchased, while about Rs. 12 cr equipment is to be acquired from a promoter group company. Such disclosures raise questions, as to whether corners are being cut on purchase of critical equipments, as well as dealings on arms’ length basis. In this light, we are compelled to connect the dots that one of company’s 4 plants had received import alert and US FDA warning letter in Jan-Mar 2020, for significant violations of GMP regulations for finished pharmaceuticals, which is still in operation even after 16 months from receipt.
• Cadila Healthcare acquired 51% stake in wholly owned subsidiary Windlas Healthcare in Oct 2018 for Rs. 155.5 cr, leading to Rs. 49 cr exceptional gains for Windlas Biotech in FY19. In April 2020, this was re-purchased at a lower price of Rs. 103.5 cr, while Rs. 27 cr goodwill on acquisition was entirely impaired just after a year in FY21 and the subsidiary was merged into the company. Such accounting jugglery before IPO is not viewed with an investor-friendly lens.
• Upside sharing agreement with Tano Capital beyond 25% IRR (not triggered though), Rs. 10 cr land purchase from promoter in prior years among others adds to potential corporate governance risks which may arise.

Low Growth and Weak Margin Profile

Between FY18-21, company’s revenue grew at just 7% CAGR and EBITDA at 10% CAGR, leading to 13% EBITDA margin. This margin is among the lowest in the complex pharma business, as some generic peers report EBITDA as high as 40%. CDMO is a high margin business, but that doesn’t seem to be the case for Windlas, as its material cost is nearly 64% of revenue, vis-à-vis 40-50% for peers. Adjusted for exceptional items, company’s PAT for FY21 stood at close to Rs. 33 cr, leading to 8% net margin and adjusted EPS of close to Rs.17.9.

Steep Pricing

Windlas IPO is priced at FY21 adjusted PE multiple of 26x, which is very aggressive, given its smaller size of operations, slow historic growth and significantly lower margin. Recently concluded IPO of Glenmark Life, which garnered 44x subscription, engaged in complex APIs and deriving 10% of revenue from CDMO and 35% EBITDA margin, was priced at a PE multiple of 22x. Even other smaller pharma companies with revenue up to Rs. 1,000 cr and stronger net margins and are ruling at PE multiples below 20x. Thus, pricing of Windlas is quite steep.

Heavy dilution of 40% in a small cap stock with PE investor making a complete exit are some other headwinds. Besides, there is no dearth of opportunities in both primary and secondary market.

Conclusion
Industry-lagging margins, corporate governance red flags and steep pricing does not merit a look and the IPO is an clear ‘avoid’.

Grey Market Premium (GMP) of Windlas Biotech: Grey Market Premium of Windlas Biotech 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.