API manufacturer Supriya Lifescience's Rs 700-crore IPO reasonably priced

Growth prospects and scope for margin expansion are other triggers, say brokerages

Supriya Lifescience, a major manufacturer of active pharmaceutical ingredients (APIs) is raising Rs 700 crore from the primary market. While a majority of the equity raise is an offer for sale and will lead to promoter stake dilution, part of the funds will be used to fund capital expenditure and reduce debt.

Though the company has a basket of 38 APIs, its focus is on high-value products with limited competition. About three fourths of its revenues comes from exports with the company having a dominant position in some of the APIs. In the FY17-21 period, it was the largest exporter in anti-histamine and anti-allergic drug chlorpheniramine maleate with a share of 45-50 per cent. Its share in pain management drug ketamine hydrochloride is even higher at 60-65 per cent.

The company is also one of the largest exporters of anti-asthma drug salbutamol sulphate with a 31 per cent share in FY21. While it is primarily an exporter, it has low geographic concentration risk and is present across regulated and non-regulated markets.

One of the key advantages for the company is the backward integration of its business model with inhouse production 12 of its existing product base or 60 per cent of revenues. This will help in achieving increased margins and lower dependence on suppliers for key starting material. Fresh capex will strengthen its manufacturing presence and help expand its portfolio across its markets and segments. The other trigger for higher margins, according to Arihant Capital Markets is the increased exposure to regulated markets.

A de-risked business model and strong growth has helped it to deliver consistent financial performance over the last few years. While revenues have grown by 18 per cent, operating and net profit have risen faster registering a growth of 57 per cent and 77 per cent respectively.

Sneha Poddar of Motilal Oswal Financial Services (MOFSL) says that the company is well placed to tap the opportunity in the pharma API market given its strong pipeline and focus on diversification. MOFSL believes that the issue is reasonably valued at 17.8 times its FY21 earnings on a post issue basis. This is attractive as compared to peers which are available at an average price to earnings ratio of 22.8 times though the growth trajectory remains similar. While there are multiple positives, the key risk for investors is the client concentration with top 10 customers accounting for 47 per cent of revenues investors. Further the top 10 APIs account for 80 per cent revenues which, in the event of a demand impact, could dent the topline.