Blue Jet Healthcare

Pharma and healthcare ingredient maker

Generated a majority of its revenue from Europe in Q1 FY2024

Incorporated in 1968, Blue Jet Healthcare is a speciality pharmaceutical, healthcare ingredient and an intermediates company, offering niche products to pharmaceutical companies.

The company mainly deals in three product categories: (1) contrast media intermediates, (2) high-intensity sweeteners, and (3) pharma intermediates and active pharmaceutical ingredients. In Q1 FY2024, contrast media intermediates represented 72% of sales, high-intensity sweeteners 22.48%, pharma intermediates and API 5.29%, and others 0.23%.

Contrast media are agents used in medical imaging to enhance the visibility of body tissues under X-rays, computed tomography (CT), magnetic resonance imaging (MRI) or ultrasound. The company supply a critical starting intermediate and several advanced intermediates primarily to three of the largest contrast media manufacturers in the world, including GE Healthcare AS, Guerbet Group, and Bracco Imaging S.p.A, directly.

As of June 30, 2023, the company had commercialized contrast media intermediate portfolio of 19 products. It had supplied over 75% of the value of exports of selected contrast media intermediate (5-Amino-N,N‘-bis (2,3-dihydroxypropyl) isophthalamide) from India, over the calendar years 2020 to 2022.

The company’s high-intensity sweetener business involves development, manufacture and marketing of saccharin and its salts, which is backward integrated. Saccharin is primarily used in table-top sweeteners, oral care products such as toothpastes and mouthwashes, beverages (primarily soft-drinks), confectionary products (such as mints, candies, and bakery products), pharmaceutical products, food supplements and animal feeds.

The company has become part of the select supplier base of several multi-national companies in the oral care and non-alcoholic beverage markets, such as Colgate Palmolive (India), Unilever, Prinova US LLC, and MMAG Co.

The company’s CDMO activity in the pharma intermediate and API business primarily focuses on collaborating with pharmaceutical companies by providing them with pharma intermediates that serve as building blocks for APIs in chronic therapeutic areas, such as the cardiovascular system (CVS), oncology and central nervous system (CNS), including new chemical entities (NCEs).

The company currently operatethree manufacturing facilities, which are in Shahad (Unit I), Ambernath (Unit II) and Mahad (Unit III) in the state of Maharashtra, India, with an annual installed capacity of 200.60 KL, 607.30 KL and 213.00 KL, respectively, as of June 30, 2023. Its Unit II facility is certified by the World Health Organization for good manufacturing practices and is registered with the US-FDA.

Over the last six years, to meet increased customer demand, the company has strategically incurred capital expenditures to expand its manufacturing capacity. In FY2021, the company acquired a greenfield manufacturing site on a leasehold basis in Ambernath (Unit IV) to build several multi-purpose blocks dedicated to pharma intermediate and API business. The company expects this Unit IV facility to be operational during FY2025 and have an estimated installed capacity of 71 KL subject to obtaining approvals.

The company has plans to expand its existing production capacities in Unit II, from 607.30 KL as of June 30, 2023, to 743 KL by FY2025. In Unit III, the company plans to increase production capacity from 213.00 KL as of June 30, 2023, to 499 KL as of FY2025. Once the capacity expansion is completed and Unit IV is operational, its total annual production capacity is expected to reach 1,513.6 KL by the end of FY 2025.

In the past three FYs and the three months ended June 30, 2023, the company invoiced more than 400 customers in 39 countries.

In the three months ended June 30, 2023, the company’s capacity utilization was 65.88%.

The company derives majority of its revenue from regulated markets of Europe. In Q1 FY2024, Europe contributed 77.52% to total sales, India 12.24%, USA 3.95%, and others 6.29%.

Offer and its objects

The IPO will complete the OFS comprising of 2,42,85,160 shares worth Rs 840.27 crore by existing shareholders. The selling shareholders are Akshay Bansarilal Arora and Shiven Akshay Arora.

The price band for the IPO is Rs 329 to Rs 346 per equity share of face value Rs 2 each.

The company will not directly receive any proceeds from the offer, and all the offer proceeds will be received by the selling shareholders, in proportion to the offered shares sold by them.

Promoters of the company are Akshay Bansarilal Arora, Shiven Akshay Arora, and Archana Akshay Arora. Promoters and the promoter group hold an aggregate of 173,465,415 equity shares, aggregating to 100% of the pre-offer issued and paid-up equity share capital. The post IPO shareholding for the same is expected to be around 86%.

The issue, through the book-building process, will open on 25 October 2023 and will close on 27 October 2023.

Strengths

The company is a large manufacturer of contrast media intermediates in India, which is a high barrier to entry business. Moreover, the company supplies critical starting intermediate and several advanced intermediates primarily to three of the largest contrast media manufacturers in the world, including GE Healthcare AS, Guerbet Group, and Bracco Imaging S.p.A, directly.

The company has Long-standing relationships and multi-year contracts with its customers. Its contracts range from one to four years, thus providing strong visibility of revenue. More than 70% of its sales in each of FYs 2021, 2022 and 2023 and the three months ended June 30, 2023, were backed by contracted sales volumes, through both annual and multi-year contracts.

The company’s manufacturing is driven by customer demands, which are contracted in advance. Given the nature of its medium- to long-term supply contracts with customers, the company is able to plan for capacity utilization and expansion ahead of time. As the offtake volume of its customers increased, its production capacity also increased from an aggregate installed capacity of 230 KL as of March 31, 2018, to 1,020.90 KL as of June 30, 2023.

The company manufactures a range of products in-house, including the key starting intermediate and advanced intermediates, which allows it to control production process for consistent quality and cost effectiveness.

Globally, there is an increasing trend to outsource manufacturing by pharmaceutical companies. Given the company’s analytical research, chemistry capabilities and long-standing relationships with innovator companies, it is well placed to benefit from this trend.

The company is run by professional and experienced management team. Its Executive Chairman, Akshay Bansarilal Arora, has over three decades of experience in business operations, project management and business development. Managing Director Shiven Akshay Arora has more than six years of experience in business management.

The company is in the process of augmenting its R&D capacity and capabilities, which will allow it to (i) develop and improve its products, and (ii) optimize the production process.

Weaknesses

The company is dependent on the sale of its products to a limited number of key customers. The loss of one or more such customers, could adversely affect business. In Q1 FY2024 and FY2023, revenue from its largest customer represented 59.71% and 63.36% of sales, respectively.

The company generates a significant portion of its revenue from operations from contrast media intermediates business segment. Any reduction in demand for products in this segment could adversely affect results. In Q1 FY2024 and FY2023, contrast media intermediates contributed 72% and 70.57% to sales, respectively.

The company’s statutory auditors and the previous statutory auditors have included certain observations for FY2021 and 2022. For example, in FY2021 and 2022, certain delays and defaults were observed in the repayment of loans or borrowings and interest thereon to banks. Further, in FY2022, certain material differences and reconciliation items were observed in the quarterly stock statements filed by the company with certain banks or financial institutions from which it sanctioned working capital.

The company’s operations are subject to extensive government regulations governing the Indian and global pharmaceutical market. Any failure to comply with the applicable statutory or regulatory requirements may lead to penalties.

Trademark used by the company is owned by Promoter, Akshay Bansarilal Arora. The promoter has granted ownership of the below trademark on lease. For the first three years of the lease, the trademark will be granted at nil consideration and thereafter company may be required to pay royalty fees.

The company depends upon a limited number of raw material suppliers and its three largest suppliers are in China, Norway, and India. Any delay, interruption or reduction in the supply or transportation of raw materials may adversely affect business. In FYs 2021, 2022 and 2023 and the three months ended June 30, 2022, and June 30, 2023, its three largest raw material suppliers represented 82.17%, 41.68%, 53.04%, 59.53% and 51.59% of its cost of goods sold, respectively.

The company face foreign exchange risk as, significant portion of its total revenue is denominated in currencies other than Indian rupees. In FYs 2021, 2022 and 2023 and the three months ended June 30, 2022, and June 30, 2023, exports to regions outside India accounted represented 84.69%, 82.05%, 85.76%, 80.67% and 87.33%, respectively, of its revenue.

The company is dependent on the regulated markets of Europe for a significant portion of its revenue. If market growth in this region decreases or market acceptance for competitors’ products increases, its business could be adversely affected. In Q1 FY2024 and FY2023, Europe contributed 77.52% and 74.49% to sales, respectively.

All of company’s infrastructure, manufacturing facilities and business operations are currently concentrated in Maharashtra, India. Any adverse developments affecting this region could have an adverse effect on its business.

Valuation

In Q1 FY2024, standalone sales were up by 24.24% to Rs 179.54 crore compared to Q1 FY2023. OPM increased by 632 bps to 32.83%, which led to 53.85% increase in operating profit to Rs 58,95 crore. Other income increased 16.12% to Rs 5.06 crore, while interest cost fell 85.23% to Rs 0.05 crore and depreciation increased 2.47% to Rs 6.05 crore. PBT increased 58.90% to Rs 57.92 crore. Tax expenses for Q1 FY2024 were Rs 13.80 crore compared to tax expense of Rs 8.60 crore in Q1 FY23. Net profit increased 58.42% to Rs 44.12 crore.

In FY2023, standalone sales were up by 5.49% to Rs 720.98 crore compared to FY22. OPM decreased by 608 bps to 30.39%, which led to a 12.10% decrease in operating profit to Rs 219.09 crore. Other income increased 23.41% to Rs 23.96 crore, while interest cost fell 58.82% to Rs 1.36 crore and depreciation increased 13.22% to Rs 25.07 crore. PBT decreased 10.94% to Rs 216.62 crore. Tax expenses for FY23 were Rs 56.58 crore compared to tax expense of Rs 61.64 crore in FY22. Net profit fell 11.87% to Rs 160.03 crore.

The TTM EPS on post-issue equity works out to Rs 10.16. At the upper price band of Rs 346, P/E works out to 34.

In FY2023, Blue jet Healthcare OPM and ROE stood at 30.39% and 26.6%, respectively. There are no listed companies in India engaging in a business similar to that of Blue Jet Healthcare.