Stock Fundamentals

Should you subscribe to Windlas Biotech IPO?

Sai Prabhakar Yadavalli BL Research Bureau | Updated on July 31, 2021

Based on reported EPS of ₹8.7 in FY21, the valuation is at 54 times earnings, at the higher end of IPO price

Windlas Biotech (Windlas), the fifth largest domestic CDMO (Contract development and manufacturing organization) in India aims to raise around ₹400 crore. Out of this ₹237 crore is an offer for sale from existing shareholders. The PE investor from 2015, Tano India are putting their entire 22 per cent stake on the block with this IPO.

Windlas provides development and manufacturing services to Indian generic formulation manufacturers, serving 7 of the top 10 in India including MNCs. The company operates from four plants in Dehradun and is primarily into CDMO operations. Windlas is also developing a trade generics business which sells unbranded generics in a low-cost setting.

The Windlas IPO is at the higher end of the closest industry (API manufacturers) valuation range. The valuation hinges on the company sustaining its historical bottom line growth at around 20 per cent in the medium-term. Long term investors need not subscribe to the IPO now. They can wait to see how company’s results play out in quarters post listing and enter later based on sustainability of earnings and valuation.


Based on reported EPS of ₹8.7 in FY21, the valuation is at 54 times earnings, at the higher end of IPO price. Adjusted for the impairment charge in FY21 (₹27 crore), the PE multiple is around 32 times FY21 earnings compared to other API manufacturers who trade at 24-35 times FY21 earnings. Increased outsourcing may support the higher multiple for CDMO industry.

Earnings sustainability?

Windlas has to sustain a growth of 20 per cent in top and bottom line for the next two years for an acceptable, P/E to growth ratio (PEG ratio), of around 1.5 times. Although the company has generated such growth in the past, it was aided by factors such as the Covid outbreak and reduction in interest costs.

Windlas has reported revenue and adjusted earnings (before extraordinary items) growth of 19 per cent and 26 per cent in the period FY19-21. The revenue growth was driven by the growth in number of customers and products it handled. The revenue growth in FY21 also gained from Covid-19 related sales, adjusted for which growth would be similar to industry growth rates of 13 per cent. Even as EBITDA margins improved only marginally to 12.8 per cent in FY21, deleveraging aided faster bottom line growth.

Windlas’ current utilization rates hover around 30-40 per cent which is below the optimal 65 per cent range and may not need further capex in the medium term. Windlas plans to restart its injectable operations from a new building utilising IPO proceeds. The company can expect faster than industry growth, but only marginally, as outsourcing injectable products require longer term relations. Also on the margin front, Windlas as an outsourcing partner is a price taker with limited scope of margin improvement. As interest costs benefits wind down, that aspect has also run out for supporting bottom line growth. Windlas’ large range of products aids revenue growth through cross selling, but cannot aid scale of operations with such wide ranging inputs. Large API manufacturers generate higher margins by building scale in limited range of products which cannot be replicated by CDMO operators.

‘Extraordinary’ items

Windlas has a chequered history with respect to its US formulations plant. The company’s subsidiary Windlas Healthcare issued shares to Cadila Healthcare in late 2018 whereby it acquired a controlling stake by paying ₹155 crore, a portion of which reflected as gains in P&L statement. Later as the plant received an import alert from a plant inspection in early 2020, Windlas had to buy back the share from Cadila with the same funds. The asset meanwhile went from a subsidiary to an associate investment and then back to the company along with an impairment of the ANDA filings done considering the import alert. A portion of the impairment went through the P&L and the remaining portion through reserves. The facility is now contributing to the CDMO operations of MNC companies and the company is trying for remediation as part of regulatory cycle, but may not pursue US markets anymore. Developments such as these do not inspire confidence.

Published on July 31, 2021

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