IPO watch. Supriya Lifescience IPO – Should you invest?

Supriya Lifescience Limited (SLL) is an API manufacturer (Active Pharmaceutical Ingredients) with a portfolio of 38 APIs and a strong export position in three of the products.

Supriya Lifescience serves regulated and semi-regulated markets with its backward integrated operations and has built a strong client relationship since introducing its first major product in 1991. This is reflected in the 17 per cent revenue CAGR between FY19-21 with margins scaling up to 43 per cent in FY21 from 23 per cent in FY19.

Long-term investors can subscribe to the issue based on the strong financial profile of the company, expected growth and reasonable valuations at 16.2 times FY21 earnings. The anticipated sectoral tailwinds in the API segment, from China +1 strategy and the Indian government’s recent thrust in the sector, when they gain traction, can be incremental drivers for the stock.

The public offer of the company comprises of ₹200 crore in fresh issue and ₹500 crore in offer for sale from the promoter, valuing SLL at market cap of around ₹2,200 crore. The promoter will continue to hold around 68 per cent of the shareholding post-listing from 99.9 per cent earlier.

Business

The 38 molecules that Supriya Lifescience manufacturers are spread across antihistamine (allergies), analgesic, anaesthetic, vitamin, anti-asthmatic and anti-allergic. The top three API’s (55 per cent of FY21 revenues) are Chlorpheniramine Maleate (antihistamine), Ketamine Hcl (pain) and Salbutamol Sulphate (asthma).

In these three products, Supriya Lifescience contributed to around 30-65 per cent of the API exports from India in FY21, demonstrating its strong position. The end-formulations for the three have global generic market values in a range of $30-70 million and have been prescribed for over 30-40 years. SLL's supplier relations are built over 10-25 years for each of the products, comprising 3-4 years of regulatory approvals and 7-10 years of customer scaling.

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This along with a small end-market size, provides a reasonable barrier against the competition for customer focussed API manufacturers like SLL compared to others. SLL has identified the next 12 API’s it intends to scale up with most of the products possessing requisite approvals across regulated or semi-regulated markets.

Regulatory approvals for facility and the products, from developed market regulators including the US, Europe, and China, is an important distinction for SLL compared to smaller players. Regulated market presence implies presence of quality control measures that are comparable to the largest operators.

Financials

Supriya Lifescience’s operating margins are at the higher end of the industry range having shown consistent expansion in the last three years based on factors of pricing, volumes, and cost control. Volume expansion was on the back of the capacity expansion which improved economies of scale. The company operates from Parshuram Lote, Maharashtra with an installed capacity of 547 KL/day which increased recently from 332 KL/day after adding the fourth block.

The company has acquired additional land near the current facility, which will be developed utilising the fresh issue proceeds of ₹92 crore (of the total ₹200 crore with ₹60 crore for debt repayment and remaining for corporate purposes). The new facilities will be used for other therapy lines including decongestants and anti-gout medication. SLL generated revenues of ₹385 crore in FY21 and ₹224 crore in H1-FY22 with EBITDA margins at 43.4 and 41.6 per cent respectively.

Pricing improved primarily on regulated market access and not from pandemic shortages for SLL. SLL started applications in regulated markets of the US, Europe, and China, from 2014 which showed results from 2017 onwards with increased regulated market contributions in revenue.

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Regulatory approval and slow shift to regulated markets have aided pricing. For instance, as Ketamine Hcl gained regulated market approvals, the average selling price improved from ₹16,000-18,000 per ton in FY17 to close to ₹22,000 per ton in FY21.

According to management emphasis on a backward integrated model of production has contributed to the difference in margin realised compared to its peers. Even with additional capacities introduced from time to time, Supriya Lifescience focussed on strengthening the production process for its relevant end products. SLL has 12 of its 38 products that are backward integrated.

For these products, the raw materials SLL procures can be termed as basic chemicals which are 7 to 8 steps removed from the final product, compared to normal procurement of advanced intermediaries for API production which involve 2 or 3 steps for the final product. Such a model of value capture across several intermediate steps allows for not only a higher margin profile but also allows greater control on production, raw material supplies (lower reliance on China for advanced intermediaries) and pricing.

Supriya Lifescience's valuation

Valuations of API manufacturers have a potential tailwind from structural factors, which are yet to be reflected on the financials of the companies involved – China +1 and government initiatives including, production linked incentive schemes (PLI) and bulk drug parks.

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So far there is no discernible impact of either on SLL, but the company is positive on the opportunities created and is in the ideation phase with respect to both including – widening supplies to customers looking to replace Chinese supplies and considering projects which might fit the bill in PIL scheme.

Supriya Lifescience priced at 16.2 times FY21 earnings offers favourable risk-reward based on fundamentals of the company and industry tailwinds can be a positive surprise at such valuations. SLL also has a good balance sheet with marginal net cash, which can further improve post inflow of issue proceeds.