Emcure Pharma IPO review (Apply)

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Review By Dilip Davda on June 28, 2024

•    EPL is R & D driven pharma company engaged in developing, manufacturing and marketing of broad range of pharma products.
•    It posted continued growth in its top lines for the reported periods. 
•    However, its bottom line posted declining trends with higher provisions for interest and depreciations. 
•    Based on FY24 earnings, the issue appears fully priced.
•    Investors may park funds for the medium to long term rewards.

ABOUT COMPANY:
Emcure Pharmaceuticals Ltd. (EPL) is an Indian pharmaceutical company engaged in developing, manufacturing and globally marketing a broad range of pharmaceutical products across several major therapeutic areas. It is a research and development ("R&D") driven company with a differentiated product portfolio that includes orals, injectables and biotherapeutics, which has enabled the company to reach a range of target markets across over 70 countries, with a strong presence in India, Europe and Canada. 

EPL ranked as (i) the 13th largest pharmaceutical company in India in terms of Domestic Sales for MAT Financial Year 2024, (ii) the 4th largest pharmaceutical company by market share in its Covered Markets in terms of Domestic Sales for MAT Financial Year 2024, and (iii) the largest pharmaceutical company in the gynecology and human immunodeficiency virus ("HIV") antivirals therapeutic areas in India in terms of Domestic Sales for MAT Financial Year 2024 (Source: CRISIL Report). It has experienced rapid growth in sales in India in recent years. EPL's sales in India contributed to 48.28% of its total revenue from operations for the Financial Year 2024. Between MAT Financial Year 2020 and MAT Financial Year 2024, its Domestic Sales grew at a CAGR of 9.73%, outperforming the Indian pharmaceutical market ("IPM"), which grew at a CAGR of 8.19%, by 1.19 times (Source: CRISIL Report). 

The company had a Covered Market presence of 52.66% of the IPM in terms of Domestic Sales for MAT Financial Year 2024 (Source: CRISIL Report). EPL's competitive advantage in the domestic market stems from its differentiated product portfolio, which has allowed it to establish its presence in most of the major therapeutic areas, including gynecology, cardiovascular, vitamins, minerals and nutrients, HIV antivirals, blood-related and oncology/anti-neoplastics. Across the gynecology, vitamins, minerals and nutrients, HIV antivirals, blood-related and oncology/antineoplastics therapeutic areas, it ranked among the 10 largest pharmaceutical companies in India in terms of Domestic Sales for MAT Financial Year 2024 (Source: CRISIL Report). Sales of its iron, chiral, biotherapeutics, injectables and photo-chemistry products contributed to 52.97% of revenue from sales in India for the Financial Year 2024, demonstrating its approach towards establishing a differentiated product portfolio.

EPL is focused towards pharmaceutical products used in chronic (including sub-chronic) therapeutic areas. Chronic therapeutic areas in the IPM are expected to register higher growth than acute therapeutic areas over the next five Financial Years (Source: CRISIL Report). Chronic therapeutic areas contributed to Rs. 2546.05 cr. or 46.22% of its total Domestic Sales for MAT Financial Year 2024 (Source: CRISIL Report).  As of March 31, 2024, it had 11,146 permanent employees including 25.92% on contractual basis.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden/combo book-building route IPO of fresh equity shares issue worth Rs. 800 cr. (approx. 7936502 shares at the upper cap), and an Offer for Sale (OFS) of 11428839 equity shares (worth Rs. 1152.03 cr. at the upper cap). The company has announced a price band of Rs. 960 - Rs. 1008 per equity shares of Rs. 10 each. The overall size of the issue will be approx. 19365341 shares worth Rs. 1952.03 cr. The issue opens for subscription on July 03, 2024, and will close on July 05, 2024. The minimum application to be made is for 14 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 10.24% of the post-IPO paid-up equity capital. From the net proceeds of the fresh equity issue, the company will utilize Rs. 600.00 cr. for repayment/prepayment of certain borrowings, and the rest for general corporate purposes. 

The offer includes a reservation of 108900 equity shares for its eligible employees and offering them a discount of Rs. 90 per share. From the rest, it has allocated not more than 50% for QIBs, not less than 15% for HNIs and not less than 35% for Retail investors. 

The joint Book Running Lead Managers (BRLMs) to this issue are Kotak Mahindra Capital Co. Ltd., Jefferies India Pvt. Ltd., J. P. Morgan India 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. 35 - Rs. 497.30 per share (based on Rs. 10 FV), between September 2000 and March 2024. It has also issued bonus shares in the ratio of 1 for 1 in January 1994, 1 for 1 in March 1994, 2 for 1 in September 2001, 3 for 2 in June 2006, 3 for 1 in March 2016, and xx for xx in xx.  The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.04, Rs. 0.49, Rs. 0.89, Rs. 0.99, Rs. 1.11, Rs. 1.23, Rs. 1.33, Rs. 1.56, Rs. 1.93, Rs. 1.96, Rs. 2.41, Rs. 2.50, Rs. 3.42, Rs. 3.44, Rs. 4.30, Rs.5.03, Rs. 5.43, Rs.7.96, Rs. 10.46, Rs.13.34, Rs. 19.37, Rs. 123.39, and Rs. 277.12 per share. 

Post-IPO, its current paid-up equity capital of Rs. 181.15 cr. will stand enhanced to Rs. 189.09 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 19060.13 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 of Rs. 5918.86 cr. / Rs. 702.56 cr. (FY22), Rs. 6031.72 cr. / Rs. 561.85 cr. (FY23), and Rs. 6715.24 cr. / Rs. 527.58 cr. (FY24). The company marked declining trends for its bottom lines for the reported periods. According to the management, this is attributed to higher interest and depreciation provisions. The company completed its planned expansion with borrowed funds and all those four new facilities are on stream now. With reduction of debts, and thrust for higher domestic market penetration that brings higher margins, its bottom line will improve going forward. 

For the last three fiscals, the company has posted an average EPS of Rs. 29.68 and an average RoNW of 21.08%. The issue is priced at a P/BV of 6.18 based on its NAV of Rs. 163.22 as of March 31, 2024, and at a P/BV of 5.08 based on its post-IPO NAV of Rs. 198.44 per share (at the upper cap). 

If we attribute FY24 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 36.13. Based on FY23 earnings, the P/E stands at 33.93. Thus the issue appears fully priced. 

The company reported PAT margins of 11.81% (FY22), 9.31% (FY23), 7.86% (FY24), and RoCE margins of 29.69%, 22.01%, 19.37% for the referred periods, respectively. 

DIVIDEND POLICY:
The company has paid dividends for FY22 (30%), FY23 (20%), and FY24 (20%). It has already adopted a dividend policy in December 2023, based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Dr. Reddy's Lab, Cipla Ltd., Alkem Lab., Torrent Pharma, Mankind Pharma, Abbott India, and J B Chemicals as their listed peers. They are trading at a P/E of 18.6, 28.1, 31.1, 58.8, 46.9, 48.4 and 47.2 (as of June 27, 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 52 pubic issues in the past three fiscals, out of which 14 issues closed below the offer price on the listing date. 

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