Supriya Lifescience

Global manufacturer of APIs

Backward integrated model ensures steady supply of intermediates at equitable cost

Supriya Lifescience is one of the key Indian manufacturers and suppliers of active pharmaceuticals ingredients (APIs), with a focus on research and development.

As of October 31, 2021, Company has niche product offerings of 38 APIs focused on diverse therapeutic segments such as antihistamine, analgesic, anesthetics, vitamin, anti-asthmatic and antiallergic.

Pharmaceutical business of the company is organized into two segments- domestic and export sales. From April 1, 2020, until October 31, 2021, products of the company were exported to 86 countries to 1,296 customers including 346 distributors.

Company has grown its API business in several countries across (1) Europe, which contributed 17.40 % and 18.53 % of revenue from operation for the year ended March 31, 2021 and for the six month period ended September 30, 2021, respectively; (2) Latin America, contributed 19.15 % and 12.01 % , respectively;(3) Asia (excluding India), contributed 29.27 % and 36.76 %, respectively;(4) North America, contributed 4.76 % and 2.36 %, respectively;and (5) India, contributed 22.53% and 26.43%, respectively.

In FY 2021, regulated markets contributed 38.17% of total sales and semi-regulated and non-regulated markets contributed 61.83%.For the six month period ended September 30, 2021 Regulated markets contributed 49.22% of total sales and semi-regulated and non-regulated markets contributed 50.78%.

For FYs 2019, 2020, 2021 and for the six-month period ended September 30, 2021, export sales accounted for 70.96%, 71.85%, 77.47% and 73.57%, respectively, of revenue from operations. Similarly, for FYs 2019, 2020,2021 and for the six month period ended September 30, 2021, domestic sales accounted for 29.04%, 28.15%,22.53% and 26.43%, respectively, of total revenue.

Business operations of the company are supported by a modern manufacturing facility located in Parshuram Lote, Maharashtra, which is approximately 250 km from Mumbai. Its manufacturing facility has received approvals from USFDA, EDQM TGA-Australia, KFDA-Korea, PMDAJapan, NMPA (previously known as SFDA)- China, Health Canada, in relation to the products being exported to the relevant jurisdictions

The manufacturing facility is spread across 23,806 sq.mt, having reactor capacity of 332 KL/ dayand seven cleanrooms. In addition, company has acquired a plot of land, admeasuring 12,551 sq.mt, near the present manufacturing facility, wherein the Company intends to expand its manufacturing infrastructure.

Company’s customers include global pharma companies such as Syntec Do Brasil LTDA, American International Chemical Inc and AT Planejamento E Desenbolvimento De NegociosLtda, with whom it has business relationship for over nine years, and SuanFarma Inc, Acme Generics LLP, Akum Drugs Ltd and Mankind Pharma Ltd with whom it has business relationship for over four years.

Company intends to continue to drive R&D initiatives towards the development of innovative APIs. It also intends to improve its R&D capabilities, with a focus on capturing more high-value first-to-market opportunities in key international markets, as well as leveraging broad product basket to enhance market position globally.

As of October 31, 2021, company has filed 14 active DMFs (Drug Master File) with the USFDA (Food and Drug Administration) and eight active CEPs (Certificate of Suitability) with EDQM (European Directorate for the Quality of Medicines and HealthCare) for its API products in therapeutic areas such as antihistamine, analgesic, anesthetic, vitamin, anti-asthmatic and anti-allergic.

Offer and its objects

The IPO comprise of fresh issue of equity shares worth up to Rs 200 crore and an offer for sale of Rs 500 crore by existing shareholders.

Price band for the IPO is Rs 265 to Rs 274 per equity share of face value Rs 2 each.

Objectives for the fresh issue are funding capital expenditure requirements of Rs 92.3 crore, Rs 60 Crore for Repayment/pre-payment, in full or part of borrowings and remaining amount will be used for general corporate purposes.

Satish Waman Waghis the Promoter of the Company, which currently holds an aggregate of 72,642,390 Equity Shares, aggregating to 99.26% of the pre-offer issued and paid-up Equity Share capital.The post IPO shareholding for the same is expected to be around 68.24%.

The issue, through the book-building process, will open on 16 Dec 2021 and will close on 20 Dec 2021.

Strengths

Company has a track record of delivering strong financial performance, Its consolidated revenue from operations for FYs 2021, 2020 and 2019 was Rs 396.22 crore, Rs 322.71 crore and Rs 285.86 crore, respectively. Revenue grew at a CAGR rate of 17.73% from FY2019 to FY2021.

Company has leadership position across key and niche products. Company has consistently been the largest exporter of Chlorpheniramine Maleate and Ketamine Hydrochloride from India, contributing to 45-50% and 60-65% respectively, of the API exports from India, between FYs 2017 and 2021.Company is also the largest exporter of Salbutamol Sulphate in India contributing to 31% of the API exports from India in FY 2021 in volume terms.

Company is focused on products which are high on value and low on competition, so it is well positioned to derive relatively higher returns from investments.

Company is in the process of further diversifying its product portfolio with strong product pipeline. A diversified product portfolio diminishes the risk associated with the dependence on any therapeutic area.

Company has a backward integrated business model for active pharmaceuticals ingredients (APIs), this model ensures steady supply of intermediates at an equitable cost, avoiding any market fluctuations. As on October 31, 2021, 12 of its existing products are backward integrated, which contributed 67.14% and 60.17.% of the total revenue for Fiscal year 2021 and for the six-month period ended September 30, 2021 respectively.

Company has acquired a plot of land, admeasuring 12,551 sq.mt, near the present manufacturing facility, wherein the Company intends to expand its manufacturing infrastructure. The proposed expansion of manufacturing facilities is expected to enhance key starting material manufacturing capabilities.

Company has geographically diversified revenue sources with a global presence across 86 countries. From April 1, 2020 until October 31 2021, company’s products were exported to 86 countries including (1) regulated markets such as USA, China, Japan, Germany, Spain, Indonesia, South Korea and Switzerland; and (2) semi-regulated and non-regulated markets such as Brazil, Mexico, Chile, Taiwan, Malaysia; Bangladesh, South Africa, Kenya, Jordan and Egypt, through its own marketing and distribution network as well as by entering into distribution arrangements with pharmaceutical distributors in these markets.

Company has advanced manufacturing and research and development capabilities. It has four manufacturing blocks which are segregated therapeutic segment wise. The fourth block commenced operation on May 30, 2021. The manufacturing facility includes well delineated areas for R&D, quality control (chemical microbiology), quality assurance, dedicated areas for engineering maintenance, warehouse, materials and finished goods stores.

Company’s Promoter and Chairman, Satish Wagh, has extensive experience in the pharmaceutical sector. SatishWagh is the recipient of the (1) National Award for Research & Development Effort in Small Industries 1999 by Ministry of Small Scale Industries; (2) National Award for Outstanding Entrepreneurship Efforts 2007 by Ministry of Micro, Small and Medium Enterprises; (3) National Award for Quality Products in Small Scale Sector for Manufacturing of Basic Drugs 2003 by Ministry of Small Scale Industries; (4) National Award for Research & Development 2010 by Ministry of Micro, Small and Medium Enterprises; and (5) Certificate of Excellence Times Inspiring Leaders 2021.

In FY 2020, company undertook the strategic acquisition of Swastik Industries, which was primarily engaged in the business of manufacturing of APIs. The acquisition of the manufacturing facility of Swastik Industries enabled optimal utilization of manufacturing resources and collation of manufacturing capabilities under one entity.

Weaknesses

Company operates in a highly regulated industry and its operations are subject to extensive regulation. Failure to comply with regulations prescribed by governments and regulatory agencies or any delay in getting approvals could lead to adverse impact on financial performance.

Company generates a significant portion of revenue from the sale of a limited number of products. For the Fiscals 2019, 2020 and 2021 and for the six-month period ended September 30, 2021, the sale of top 10 APIs and related products accounted for 81.30%, 86.06%, 80.99% and 85.94% of total revenue, respectively.

Company derives significant portion of its revenue from a few customers and the loss of one or more such customers, could lead to deterioration of financial condition or prospects. Top 10 customers contributed to 30.24%, 32.09%, 40.10% and 47.13% of revenue from operations for Fiscals 2019, 2020, 2021 and for the six-month period ended September 30, 2021, respectively.

Company purchase Raw materials primarily from suppliers in India, China, Europe, and USA. For the period from April 1, 2021, to October 31, 2021, 32% raw material was purchased from China, 5% from USA and 2% from Europe. So, any price fluctuations due to inflation, seasonality and global supply could adversely affect profitability.

The pharmaceutical industry is a highly competitive market with several major pharmaceutical companies present, and therefore it is challenging to improve market share and profitability.

As of October 31, 2021, Company had total outstanding borrowings of Rs 80.94 crore,its financing agreements include conditions and restrictive covenants. These restrictions may limit its flexibility in responding to business opportunities, competitive developments and adverse economic or industry conditions.

As a significant portion of company’s revenue comes from exports. Anyexchange rate fluctuations could affect the amount of income and expenditure recognized by the company.

Company has entered various transactions with related parties and may continue to do so in the future, which may potentially involve conflicts of interest with the equity shareholders.

Registered Office and Corporate Office premises are not owned by Company but are taken on leasehold basis pursuant to contractual arrangements with its Promoter. Further, some of its lease agreements and leave and license agreements may not have been duly stamped as per applicable law. An instrument not duly stamped, or insufficiently stamped, may attract a penalty as prescribed under applicable law, which could adversely affect business and financial condition.

Valuation

For FY 2021, consolidated sales were up by 23.66% to Rs 385.37 crore compared to FY 2020. OPM increased by 1184 bps to 43.41% which led to 70.05% increase in operating profit to Rs 167.30 crore. Other income decreased 1.92% to Rs 10.86 crore, while interest cost fell 40.43% to Rs 4.08 crore and depreciation increased 4.74% to Rs 6.68 crore.PBT increased 73.96% to Rs 167.39crore.Tax expenses for FY2021 was of Rs 43.57 crore compared to tax expense of Rs 22.82 crore in FY2020. Net profit rose 68.70% to Rs 123.83 crore.

The annualized EPS(excluding extraordinary items and relevant tax) for the six-month period ended September 30, 2021, on post-issue equity works out to Rs 16.40. At the upper price band of Rs 274, P/E works out to 16.70.

As of 14 December 2021, its listed peers such as Solara Active Pharma Sciences trades at P/E of 25.5 on six-months annualized EPS, Neuland Laboratories trades at P/E of 35.26, Aarti Drugs trades at P/E of 28.77 andDivis Laboratories trades at P/E of 53. For FY21, Supriya’s OPM and ROE stood at 43.41% and 46%, respectively, compared to 23.87% and 13.95% for Solara Active Pharma Sciences, 15.67% and 10.26% for Neuland Laboratories, 20.29% and 30.69% for Aarti Drugs and 41.04% and 21.34% for Divis Laboratories, respectively.