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Mankind Pharma, a pharma/ consumer healthcare (HC) player ranked fourth by sales in the IPM (Indian Pharmaceutical Market), is IPO-bound (April 25-27). The offer is entirely an OFS of ₹4,326 crore, which is 10 per cent of the market capitalisation. It is priced at ₹1,026 - ₹1,080 per share or 32.5 times annualised 9MFY22 earnings. Considering the growth potential of pharma and FMCG, the branded portfolio geared entirely to India and also adjusting valuation for acquisition impact, the IPO seems fairly priced for long-term growth. We recommend long-term investors subscribe to the IPO.
Mankind’s pharma portfolio (85-90 per cent of CY22 revenues) is across 10+ therapies and each segment a top-10 presence in respective therapies. The consumer HC portfolio (10-15 per cent), has six brand families with leading market shares as well. The company is India-focussed (97 per cent of sales) and has a strong marketing approach. From an acute-led portfolio, Mankind has driven its chronic portfolio to 34 per cent in CY22 and is still short of 37 per cent recorded by IPM and is striving to drive Chronic growth.
Growth from brands, Chronic and R&D
The company has a wide stable of branded products, developed ground-up, of which 36/21 brands have more than ₹50/100 crore sales in CY22. In IPM, which itself generates 10 per cent growth, branded presence leads to growth and the company has demonstrated its ability by growing 1.3x IPM in last two years. The consumer healthcare seems a natural extension backed by acute pharma portfolio and readily available distribution channels for Mankind with six brands of which four have more than ₹100 crore sales in CY22. The pharma portfolio and ground presence of Mankind and its branding ability should allow for a ‘safe switch’ from prescription to OTC periodically.
Chronic-heavy portfolio leads to strong volume growth but is also harder to build. This proportion of sales has increased from 27 per cent of sales in FY18 to 34 per cent in CY22. The company has built therapy-centred sales divisions for cardio/diabetes/respiratory and neuro in the last four years to drive this segment, against a geographic-centred divisions in acute. It has added 3,000 Medical Representatives (MR) in the total strength of 11,690 MRs for chronic, who will target specialist practitioners in hospitals and metros. The in-house products in these areas will be supplemented by inorganic extensions.
Acquisition of Panacea Biotec’s portfolio is a part of chronic expansion. The portfolio with sales of ₹270 crore per year was acquired for ₹1,872 crore. The EV/EBITDA metrics were favourable as per the company even as 7 times price/sales was not. The acquisition adds lucrative formulations in India and presence at specialist doctors including transplants, anti-diabetic, and gastroenterology departments.
Unlike earlier periods, the company is open to in-licensing brands which it believes can be marketed better with its wide sales force and this applies to Panacea brands as well. Dr. Reddy’s derma and inhaler bands, Novartis’ cardiac formulation and Glenmark’s anti-diabetic brand are some of the recent examples in chronic extensions inorganically.
Mankind has been a strong marketing-led company, but its R&D division has also made a strong mark. A hormone product – Dydraboon, launched in 2019 has reported sales of ₹200 crore in CY22 and 22 per cent market share owing to strong efficacy and low competition (only filer after Abbott in India). The company is planning a facility at Udaipur to extend manufacturing base of the product. Formulations for NASH, anti-diabetes, biosimilars and inhalers are in the works. The inhalation device acquired from Dr.Reddy – Combihale, should leverage the respiratory division at Mankind.
Margins and valuations
Mankind reported average EBITDA margins of 26 per cent in FY20-22 which dropped to 22 per cent in 9MFY23. The gross margins contraction (270 bps YoY) was on account of higher API prices which could not be offset by price increases due to higher channel inventory. The contribution from Panacea sales during the period (acquired in March 2022) was lower on account of transition but the cost contribution was recorded. The acquisition also added amortisation expenses and legal expenses which impacted overall profitability. The company should recover from these events as API prices have normalised with China opening up and price increases start reflecting in sales. The turnaround of Panacea portfolio and leveraging the sales force should be monitored as Mankind may have been untested on these aspects.
The MR productivity of the company (₹7-8 lakhs per month) also lags industry leaders like Torrent Pharma or Sun Pharma (₹10-11 lakh) which can be ascribed in part to lower prices and acute-led portfolio. The recent MR additions for chronic, built around Covid times, remain under-leveraged impacting margins. With chronic growing faster than overall company by products and traction from specialists, the operating performance should improve and will be a key monitorable despite available levers.
Mankind IPO valuation at 32.5 times 9MFY23 earnings (annualised) is at the lower end of industry range of 26-66 times. The earnings also include acquisition costs from Panacea and excluding these from earnings, the PE ratio can decrease by 15 per cent. High exposure to India, a strong branded presence and scope for improvement in profitability support the subscribe recommendation.
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