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Review By Dilip Davda on July 26, 2024

•    ADPL is a global player in CDMO and other pharma products with prime focus on India. 
•    Its domestic market shares increased from 26.7% (FY21) to 30.2% (FY24).
•    Due to provisioning of Put Option calls from EBITDA, it posted poor bottom lines for the reported periods.
•    Based on FY24 adjusted earnings, though the issue appears aggressively priced, if put option liabilities removed, then it has posted a net profit of around Rs. 358 cr.
•    It is the largest third party pharma manufacturing empire.
•    Investors may park funds for the medium to long term. 

ABOUT COMPANY:
Akums Drugs & Pharmaceuticals Ltd. (ADPL) is a pharmaceutical contract development and manufacturing organization ("CDMO") offering a comprehensive range of pharmaceutical products and services in India and overseas. As one of the leading CDMOs in India, it owns the intellectual property for the manufacturing processes of several of formulations, and its core business is focused on providing end-to-end product development and manufacturing solutions to clients. 

Some of its other services include formulation research and development ("R&D"), preparation and filing of regulatory dossiers in the Indian and global markets, and other testing services. In addition to its core CDMO business, the company is also engaged in the manufacturing and sale of branded pharmaceutical formulations and active pharmaceutical ingredients ("APIs"). ADPL is the largest India-focused CDMO in terms of revenue, production capacity and clients served during the Financial Year 2023 (among CDMOs assessed by F&S) (Source: F&S Report). As a CDMO, it produces an extensive range of dosage forms including tablets, capsules, liquid orals, vials, ampoules, blow-filled seals, topical preparations, eye 26.7% during the Financial Year 2021 (Source: F&S Report). The Indian domestic CDMO market is foreSource: F&S Report).

Since inception, it has manufactured 4,146 commercialized formulations across over 60 dosage forms. During the Financial Year 2024, it manufactured formulations for 26 of the leading 30 pharmaceutical companies in terms of sales in India (Source: F&S Report). For CDMO business, it operates 10 manufacturing units, with a cumulative formulations manufacturing capacity of 49.23 billion units annually, as of March 31, 2024. Further, it expects new injectable facility to be operational in Financial Year 2025. Some of its manufacturing units have been accredited by various global regulatory agencies such as the European Good Manufacturing Practice ("EU-GMP"), the World Health Organization, Good Manufacturing Practice ("WHO-GMP") and the United States National Sanitation Foundation ("US NSF"). During the Financial Years 2024, 2023 and 2022, its manufacturing units were subject to 58 inspections by regulators and 527 audits by its clients (Source: F&S Report). 

Its longstanding relationships with clients are The Mom's Co), among others. 

For CDMO business, it has benefitted from repeat orders in the past five years from 38 of our 50 largest clients in terms of revenue, as of March 31, 2024. This reflects the quality of products and services and its commitment to meeting the evolving needs of clients. Its client relationships have matured over time. As of March 31, 2024, 26 of 50 largest clients in terms of revenue have a legacy of more than ten years with the company. This demonstrates consistency, reliability, expertise and cost efficiencies that it brings to clients.

ADPL's commitments to innovation and continuous improvement has enabled it to remain at the forefront of pharmaceutical advancement in India. Its R&D teams are dedicated to developing an expansive product portfolio with differentiated dosages, and further enhancing manufacturing processes. In addition to its core CDMO business, it actively engages in marketing own branded formulations in India and across global markets, and have established a domestic and international presence through Subsidiaries, Akumentis and Unosource, respectively. Through Akumentis, it focuses on therapy areas such as gynaecology, cardiology, orthopaedic and paediatric. Utilizing its field force of 1,532 individuals, as of March 31, 2024, it has established a domestic marketing and distribution network of medical representatives, field managers, distributors and retailers and sell over 140 brands, as of March 31, 2024. Through Unosource, it focuses on therapy areas such as anti-infectives, analgesics, central nervous system, and gynaecology. As of March 31, 2024, its international presence extends across 65 countries, and key clients include Allegens (Vietnam), Ambica International (Philippines), Caferma SAC (Peru), JDS (Myanmar), Master Pharma (Cambodia), Olainfarm (Latvia), Pharma Apex (Myanmar), Planet Pharmaceutical (Tanzania), and Unisel (Kenya), among others. 

ADPL is the largest India-focused CDMO in terms of revenue, production capacity and clients served during the Financial Year 2023 (among CDMOs assessed by F&S) (Source: F&S Report). During Financial Year 2024, it had a market share of 30.2% of the Indian domestic CDMO market by value, and which increased from 26.7% during Financial Year 2021 (Source: F&S Report). It had a market share of 10.00% by value in the total addressable Indian CDMO market in Financial Year 2024 (Source: F&S Report).

In addition to its specialization in the pharmaceutical industry, to meet the evolving needs of the market, it has expanded operations through its Subsidiary, Maxcure Nutravedics. This Subsidiary is equipped with an advanced manufacturing unit dedicated to the production of a wide array of products, including nutraceuticals, food supplements, herbal and ayurvedic formulations. Certification by the US NSF underscores its commitment to quality and safety in the production of health and wellness products, addressing the growing demand for these products in India and beyond. Furthermore, it has extended expertise to the cosmetic and dermatological sectors, manufacturing a diverse range of products. This allows it to offer a comprehensive solution to its partners in the cosmetic and dermatological industries, reflecting ADPL's dedication to supporting their success.  As of March 31, 2024, it employed a total of 16,127 personnel, including 7,388 full-time employees and 8,739 personnel on a contractual basis across our business.

According to the management, despite diversifying into own brand marketing and venturing into nutraceuticals and ayurvedic formulation, the ratio of CDMO: Other Business will continue in the range of 78:22.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden/combo IPO of fresh equity shares issue worth Rs. 680.00 cr. (approx. 10014728 shares at the upper cap), and an Offer for Sale (OFS) of 17330435 equity shares (worth Rs. 1176.74 cr. at the upper cap). The company has announced a price band of Rs. 646 - Rs. 679 per equity shares of Rs. 2 each. The overall size of the issue will be approx. 27345163 shares worth Rs. 1856.74 cr. The issue opens for subscription on July 30, 2024, and will close on August 01, 2024. The minimum application to be made is for 22 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 17.38% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, the company will utilize Rs. 159.91 cr. for repayment/prepayment of certain borrowings of the company, Rs. 227.09 cr. for repayment/prepayment of certain borrowings of subsidiaries, Rs. 55.00 cr. for working capital, and the rest for general corporate purposes. 

The company has reserved equity shares worth Rs. 15 cr. for its eligible employees and offering them a discount of Rs. 64 per share. From the rest, it has allocated not less than 75% for QIBs, not more than 15% for HNIs and not more than 10% for Retail investors.

The joint Book Running Lead Managers (BRLMs) to this issue are ICICI Securities Ltd., Axis Capital Ltd., Citigroup Global Markets India Pvt. Ltd., and Ambit Pvt. Ltd., while Link Intime India Pvt. Ltd. is the registrar to the issue. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 4.00 - Rs. 5096.17 per share (based on Rs. 2 FV), between December 2004 and May 2024. It has also issued bonus shares in the ratio of 10 for 1 in December 2021, 1 for 1 in March 2023. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NA, Rs. Negligible, and Rs. 231.64 per share. 

Post-IPO, its current paid-up equity capital of Rs. 29.47 cr. will stand enhanced to Rs. 31.47 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 10685.49 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit/ - (loss) of Rs. 3694.52 cr. / Rs. - (250.87) cr. (FY22), Rs. 3700.93 cr. / Rs. 97.82 cr. (FY23), and Rs. 4212.21 cr. / Rs. 0.79 cr. (FY24). 

For the last three fiscals, the company has posted an average EPS of Rs. - (0.87) and an average RoNW of - (2.64) %. The issue is priced at a P/BV of 13.69 based on its NAV of Rs. 49.59 as of March 31, 2024, and at a P/BV of 7.69 based on its post-IPO NAV of Rs. 88.28 per share (at the upper cap). 

The company reported PAT margins of - (6.79) % (FY22), 2.64% (FY23), 0.02% (FY24), and RoCE margins of - (18.89) %, 24.60%, 3.37%, while adjusted ROCE margins of 174.22%, 10.77% and 16.94% for the referred periods, respectively. 

Explaining this, the management informed that its put call liabilities for recent new contracts adjustments was mandatory under GAAP measures in absence of additional funding backup. Based on restated financial data, though the issue pricing appears aggressive, but if we remove such accounting provisions, the company has posted a net profit of Rs. 243.30 cr. (FY22), Rs. 53.85 cr. (FY23) and Rs. 358.56 cr. (FY24) (refer P384 of the offer document). With these set of earnings, the issue is priced at a P/E of 29.79 based on FY24 financial data, and this turns the table. Post-IPO, this Put Call Liability provisioning will be abolished and company will be in a position to place on record the real picture.  

Keeping on radar company's expansion plans, scaling up of operations, technology innovations and competitiveness of Indian CDMO globally, many PE buyers have increased their stake in such companies, and Akum is one of them. (Refer P187 of the Offer Document). 

DIVIDEND POLICY:
The company has not paid any dividends for the reported periods of the offer document. It has already adopted a dividend policy in August 2022, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Divi's Lab, Suven Pharma, Gland Pharma, Torrent Pharma, Alkem Labs, Eris Lifescience, JB Chemicals, Mankind Pharma, and Innova Captab as their listed peers. They are trading at a P/E of 79.3, 87.5, 43.1, 64.5, 33.5, 37.5, 53.1, 48.2 and 37.0 (As of July 26, 2024). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The four BRLMs associated with the offer have handled 69 pubic issues in the past three fiscals, out of which 15 issues closed below the offer price on the listing date.

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