Stock Fundamentals

Should you subscribe to Glenmark Life Sciences IPO?

Sai Prabhakar Yadavalli BL Research Bureau | Updated on July 24, 2021

Offers industry-leading margins in highly competitive active pharma ingredient making space

Glenmark Life Sciences (GLS), the API spin off from Glenmark Pharma has announced its IPO. The IPO will raise a total of ₹1,513 crore (at the upper price band) consisting of fresh issue of ₹1,060 crore. Post IPO, Glenmark Pharma shareholding will come off from 100 per cent to around 83 per cent. The IPO proceeds will primarily be used for repaying the remaining interest-bearing purchase consideration of ₹800 crore that GLS owes to Glenmark Pharma for the API carve out. Glenmark started its API operations in 2001-02 period and spun it off in early 2019 to re-organise and monetise the asset. GLS considered a minority stake sale earlier, but the surge in API industry prominence and stepped up financial performance of API operations have allowed for better monetisation opportunity now. GLS has shown revenue and EBITDA growth of around 16 per cent in 2019-21 with industry leading EBITDA margins of 30 per cent. The IPO values the API business, at relatively comparable P/E of 22.1 times. Long term investors can subscribe to the IPO and participate in the largely anticipated domestic API growth.

Domestic API Industry

The Indian API industry with 6.1 per cent global market share, has to be supplemented by Chinese imports which accounts for 68 per cent of API imports. The over reliance on Chinese supplies was not without its moments of volatility, as in the recent disruptions from China environmental clean-up (2018) and Covid-19 period. As the industry, with impetus from the government through its PLI scheme, gears up to focus on the backend of formulations, API and speciality chemicals industries are now witnessing a palpable surge in demand. GLS management has reported a strong traction in demand, a part of which it ascribes to vendors adding a local source.

Portfolio and margins

GLS derives 90 per cent of revenues from API which are described by GLS as non-commoditised, high value, and mature, products, generating high margins. The end-products GLS is active in, have lost patent exclusivities in the last 6-8 years and hence have passed through the initial years of sharp price erosion and now face manageable mid-single digit erosions. GLS also improves cost efficiencies through the product life-cycle, which might impact the top line realisations, but sustain margins or contract life. New products were introduced, based on customer timelines, at the rate of 6 per year in the last three years which replenish the constantly eroding top line and margins. GLS is planning to enter complex APIs of oncology, peptides and iron compounds and has commercialised an iron compound with two more in the pipeline. The other segment started 3 years back - CDMO (Contract Development and Manufacturing operations) contributes 8-10 per cent of revenues and bears significant potential with longer customer cycles and better margins.

GLS has more than 30 per cent market share in 4 products which contributed 43 per cent to sales in FY21 and top 10 products contributed to 66 per cent of sales. The portfolio is geared towards chronic therapies and regulated markets (66 per cent), with leading products like Telmisartan, Atovaquone, Perindopril, Teneligliptin, Zonisamide and Adapalene.

Financials and valuation

GLS reported a revenue growth of 16 per cent CAGR in FY19-21 with EBITDA margins of 30 per cent, compared to the peer set margin range of 15-20 per cent. The selectively curated chronic portfolio supported by strong execution capabilities has supported the margins. GLS has a capacity of 786 KL across its 4 manufacturing facilities operating at high 85 per cent capacity utilisation. In the medium term, 200 KL addition in existing facilities is planned, with a mix of internal accruals and debt, and in the longer term a 800 KL greenfield facility is planned, covering APIs and CDMO operations. GLS’s PLI participation is at the early stages with further clarity awaited. GLS’s will deleverage by clearing the only debt in the form of outstanding purchase consideration owed to the parent company. Similarly the parent company deleveraging with expected inflows of around ₹1200 crore from IPO (repayment + offer for sale) and further reorganisation of verticals, can focus on generics based growth aiding GLS’s largest business. At 22 times FY21 earnings, GLS is priced reasonably, compared to its peers which have witnessed re-rating in the last year on account improved prospects for domestic APIs.

Published on July 24, 2021

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