Windlas Biotech

Formulating for others

A contract manufacturer for domestic formulation players

Windlas Biotech is amongst the top five players in the domestic pharmaceutical formulations, contract development and manufacturing organization (CDMO) industry in India, in terms of revenues. The company operates three distinct strategic business verticals (SBVs): CDMO Services and Products (contributing 84.66% of total FY2021 revenues), Domestic Trade Generics and over the counter (OTC) Brands (10.22 % of total) and, lastly, Exports (5.12 % of total).

Company provides comprehensive range of CDMO services ranging from product discovery, product development, licensing, and commercial manufacturing of generic products (including complex generics) with a focus on improved safety, efficacy and cost.

Company also sells its own branded products in the trade generics and OTC markets. The company also exports generic products to several countries.

In addition, the company offers customized formulation, development, and manufacturing expertise to address the growing drug and therapy complexity.The company partners with CDMO customers early in the drug development process, which provides the opportunity to expand its relationship with the customers as molecules progress through the clinical phase and into commercial manufacturing. This results in long-term relationships with customers and a recurring revenue stream.

Key drivers of growth for the CDMO industry are increase in demand for generics,rising trend of outsourcing among the Indian pharmaceutical players and consolidation in Indian pharmaceutical industry.

There has been an increase in use of outsourcing by pharmaceutical companies driven by growth of asset light pharmaceutical companies, increasing cost awareness and manufacturing efficiency. Management intends to capitalize on such opportunities by leveraging customer relationships, R&D and innovation capabilities.

The company has two decades of experience in manufacturing both solid and liquid pharmaceutical dosage forms and significant experience in providing specialized capabilities including high potency, controlled substances, and low solubility.

The prevalence of chronic diseases in India has been increasing in the last few years. Therefore, the management is currently focusing on launching new complex generic products in the chronic therapeutic category linked to lifestyle related disorders.

Company currently has four manufacturing facilities located at Dehradun in Uttarakhand. As of December 31, 2020, manufacturing facilities of the company had an aggregate installed operating capacity of 706.38 crore tablets/ capsules, 5.44 crore pouch/ sachet and 6.10 crore liquid bottles.

Offer and its objects

The IPO comprises fresh issue of equity shares worth up to Rs 165 crore and an offer for sale of Rs 236.54 crore by existing shareholders Vimla Windlass and Tano India Private Equity Fund II.

The price band for the IPO is Rs 448 to Rs 460 per equity share of face value Rs 5 each.

Objectives of the fresh issue are: Rs 50 Crore will be used for purchase of equipment required for capacity expansion of existing facility at Dehradun Plant - IV and addition of injectables dosage capability at existing facility at Dehradun Plant - II, Rs 47.5 crore will be spent on Funding incremental working capital requirements, Rs 20 crore will be spent on repayment/prepayment of certain borrowings and remaining amount will be spent on general corporate purposes.

Ashok Kumar Windlass, Hitesh Windlass, Manoj Kumar Windlass, and the Promoter Trust are the Promoters of the company.

Promoters and promoter group holds an aggregate of 14,201,352 Equity Shares, aggregating to 78% of the pre-offer issued and paid-up Equity Share capital.The post IPO shareholding for the same is expected to be around 65.16%.

The issue, through the book-building process, will open on 4 August 2021 and will close on 6 August 2021.

Strengths

The company has innovative portfolio of complex generic products supported by robust R&D capabilities, experienced promoters, and professional and technically qualified senior management team.

The complex generic products market has a high barrier to entry as these products are generally difficult to develop and require special know-how from the development and manufacturing perspective compared to conventional generic products.

The company is amongst the top five players in the domestic pharmaceutical formulations CDMOs in terms of revenue.

The company provides CDMO services to seven of the top 10 Indian formulations pharmaceutical companies.

Many Indian companies are only GMP (Good Manufacturing Practice) compliant. If any higher regulatory compliance is mandated by the government, it may impact Smaller and unorganized players in the industry who are not equipped with technology and resources. However,the impact on organized players such as Windlas Biotech will be less.

The Indian CDMO space has seen traction in the recent times with big pharmaceutical companies preferring to outsource R&D as well as manufacturing activities. Many of the pharmaceutical players to move to asset light model have been outsourcing these activities.The increasing use of outsourcing by pharmaceutical companies for launch of new products can result in higher growth in the CDMO market and, thereby, creating opportunities for the company.

Company has a Strong and long-term relationships with leading Indian pharmaceutical companies.The number of domestic CDMO customers of the company have increased from 97 in FY 2019, 143 in FY2020 to 204 in FY 2021, leading to a CAGR increase of 45% from FY2019 to FY2021.

Weaknesses

Revenues from CDMO Services and Products segment have historically been derived from a small customer base. In FYs 2019, 2020 and 2021, the company's top 10 customers represented 57.01%, 57.14% and 57.87%, respectively, of total revenues. The loss of one or more of these significant customers can have adverse impact on company's financials.

The company operates in a highly regulated industry and its operations are subject to extensive regulation, any delay in getting approvals could lead to adverse impact on financial performance.

The domestic formulations industry is highly fragmented in terms of both, number of manufacturers and products. Contract manufacturing is also characterized by high fragmentation and competition, with large number of organized and unorganized players. As a result, the bargaining power of contract manufacturing players like Windlas Biotech is less.

The company has a high working capital requirement. Consequently, there could be situations where the total funds available may not be sufficient to fulfill commitments, thereby forcing the company to borrow additional funds.

All the company's manufacturing facilities are at Dehradun, Uttarakhand along with Registered Office. Any materially adverse social, political, or economic development can affect manufacturing operations.

Company's ability to increase cost efficiency is dependent on the availability of key raw materials at competitive prices. As the company does not have any long-term contracts with its third-party suppliers, prices are negotiated for each purchase order. Any material fluctuations in raw material prices can impact the margins negatively.

In FY 2021, the company's capacity utilization was 39.20% for tables/ capsules, 4.41% for pouch/ sachet and 39.52% for liquid bottles. Under utilization of manufacturing capacities over extended periods can negatively impact financial performance.

Valuation

After almost a flat show in FY2020, the company's consolidated sales were up by 30.03% to Rs 427.6 crore in FY2021. In FY2021, it generated revenues of Rs 35.58 crore, which accounted for 8.32% of total revenue from the sale of certain products relating to covid-19 prevention and immunity building, such as covid-19 prevention kits containing Zinc Acetate, Doxycycline and Ivermectin dispersible tablets as well as Vitamin C combinations, antiseptic gargle and sanitizers.

The OPM increased by 18 bps to 12.79% which led to 31.91% increase in operating profit to Rs 54.69 crore. Other income increased 24.37% to Rs 3.09 crore, while interest cost fell 48.93% to Rs 1.29 crore and depreciation increased 39.51% to Rs 12.97 crore. PBT increased 35.48% to Rs 43.53 crore.Profit after share of associates jumped 76% to Rs 43.36 crore. Tax expenses for FY21 was of Rs 6.17 crore compared to tax expense of Rs 8.46 crore in FY2020. Net profit fell 2.33% to Rs 15.83 crore due to exceptional items related to impairment of goodwill, net of fair value gain on subsidiary Windlas Healthcare.

The EPS on post-issue equity works out to Rs 14.38 for FY2021. At the upper price of Rs 460, P/E works out to 32.There is no comparable listed player. Considering the small size of the company, lack of significant exports, and being just a contractor to domestic formulation players, who holds all the IPRs, the asking P/E looks high.