Glenmark Life IPO review (May apply)

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Review By Dilip Davda on July 21, 2021

•    GLSL is the second group company going public after parent Glenmark Pharma.
•    The company manufactures and markets APIs, CVS, CNS related ingredients.
•    The company has posted growth in its top and bottom lines for the last three fiscals.
•    Based on FY21 earnings, the issue appears fully priced.

ABOUT COMPANY:
Glenmark Life Sciences Ltd. (GLSL) is a leading developer and manufacturer of select high value, non-commoditized active pharmaceutical ingredients ('APIs') in chronic therapeutic areas, including cardiovascular disease ('CVS'), central nervous system disease ('CNS'), pain management and diabetes (Source: Frost & Sullivan Report). It also manufactures and sells APIs for gastro-intestinal disorders, anti-infectives and other therapeutic areas. GLSL's API portfolio comprises specialized and profitable products, including niche and technically complex molecules, which it believes reflects the company's capability to branch into other high-value products.

The company has a strong market share in select specialized APIs such as Telmisartan (anti-hypertensive), Atovaquone (anti-parasitic), Perindopril (anti-hypertensive), Teneligliptin (diabetes), Zonisamide (CNS) and Adapalene (dermatology) (Source: Frost & Sullivan Report). It is also increasingly providing contract development and manufacturing operations ('CDMO') services to a range of multinational and specialty pharmaceutical companies. GLSL is a research and development ('R&D')-driven API manufacturer, focused on undertaking dedicated R&D in existing products and in areas where it believes there is growth potential in the future.

GLSL is a wholly-owned subsidiary of its Promoter, Glenmark Pharmaceuticals Limited ('Glenmark'), a research-oriented, innovation-led, global pharmaceutical company, which was established in 1977 and is listed on the BSE and NSE. In 2001-2002, Glenmark launched the API manufacturing business by setting up a manufacturing facility in Kurkumbh in the state of Maharashtra, India and focused on growing this business over the next 18 years. In 2019, the API manufacturing business of Glenmark was sold and spun off into GLSL as part of a broader reorganization designed to place Glenmark on an accelerated trajectory to attain its objectives in three different verticals, with the company focusing on the API business. Following the Spin-off, GLSL operates as an independent, professionally managed global API business.

As of March 31, 2021, it had a portfolio of 120 molecules globally and sold APIs in India and exported to multiple countries in Europe, North America, Latin America, Japan and the rest of the world ('ROW'). As of May 31, 2021, the company had filed 403 Drug Master Files ('DMFs') and Certificates of Suitability to the monographs of the European Pharmacopoeia ('CEPs') across various major markets (i.e. United States, Europe, Japan, Russia, Brazil, South Korea, Taiwan, Canada, China and Australia). As of March 31, 2021, 16 of the 20 largest generic companies globally were its customers (Source: 'A Year of Surprises Shakes Up Off-Patent Industry' | Informa, 2020) and believe that GLSL enjoys a reputation of trust and reliability with such companies.

It currently operates four multi-purpose manufacturing facilities which are situated on leasehold properties located at Ankleshwar and Dahej in the state of Gujarat, India, and Mohol and Kurkumbh in the state of Maharashtra, India with an aggregate annual total installed capacity of 726.6 KL as of March 31, 2021. Since 2015, its facilities have been subject to 38 inspections and audits by regulators including the USFDA, PMDA, COFEPRIS, Health Canada, MFDS (Korea), EDQM, other European regulatory agencies and CDSCO conducted on a periodic basis. GLSL has not received any warning letters or import alerts from such regulatory authorities.

The company intends to increase its API manufacturing capabilities by enhancing the existing production capacities at Ankleshwar facility during the financial year 2022 and Dahej facility during the financial years 2022 and 2023 by an aggregate annual total installed capacity of 200 KL. This additional production capacity is expected to help it further expand generic API production and also grow the oncology product pipeline. The company intends to develop a new manufacturing facility in India for the manufacture of generic APIs from the financial year 2022 which is expected to become operational in the fourth quarter of the financial year 2023. The new facility will also provide a platform for the growth of CDMO business and also add capacity for generic API business.

This facility will be a greenfield project built on a 40-acre footprint with a plan to manufacture both APIs and intermediates and will house several multi-purpose manufacturing blocks with mid to high-volume capacity. It will include a high degree of automation and comply with global regulatory standards and will have an aggregate capacity of 800 KL over the next three to four years. This facility is intended to be funded from internal accruals and debt financing (if required).

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for payment of outstanding purchase consideration to the promoter for the spin-off of the API business to the company (Rs. 800 cr.), funding capital expenditure (Rs. 152.76 cr.) and general corporate funds, GLSL is coming out with a maiden Initial Public Offer (IPO) comprising a fresh equity issue worth Rs. 1060 cr. (approx. 14722220 shares) and an offer for sale (OFS) of 6300000 equity shares (Rs. 453.60 cr.), thus making an overall size of the IPO to Rs. 1513.60 cr. (at the upper cap). The issue constitutes 17.16% of the post issue paid-up capital of the company.

The company has fixed a price band of Rs. 695.00 - Rs. 720.00 per share having a face value of Rs. 2 per share. The issue opens for subscription on July 27, 2021, and will close on July 29, 2021. Minimum application is to be made for 20 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. GLSL has allocated 50% for QIBs, 15% for HNIs and 35% for retail investors.

Book Running Lead Managers (BRLMs) to this IPO are Kotak Mahindra Capital Co. Ltd., BofA Securities India Ltd., Goldman Sachs (India) Securities Pvt. Ltd., DAM Capital Advisors Ltd., BOB Capital Markets Ltd. and SBI Capital Markets Ltd., while KFin Technologies Pvt. Ltd. is the registrar to the issue.

The company has issued entire equity at par so far and has also issued bonus shares in the ratio of 10 for 1 in April 2021. The average cost of acquisition of shares by the promoters is Rs. 0.14 per share.

Post issue, GLSL's current paid-up equity capital of Rs. 21.56 cr. will stand enhanced to Rs. 24.51 cr. At the upper price band of the IPO, GLSL is looking for a market cap of Rs. 8821.96 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, the company has reported turnover/net profits of Rs. 886.87 cr. / Rs. 195.59 cr. (FY19), Rs. 1549.30 cr. / Rs. 313.10 cr. (FY20) and Rs. 1885.98 cr. / Rs. 351.58 cr. (FY21).

For the last three fiscals, GSLs has posted an average EPS of Rs. 30.09 and an average RoNW of 65.88%. The issue is priced at a P/BV of 10.31 based on its NAV of Rs. 69.82 as of March 31, 2021, and at a P/BV of 4.87 based on its post-IPO NAV of Rs. 147.95 (based on upper cap).

If we attribute FY21 earnings to fully diluted post IPO equity capital, then the asking price is at a P/E of around 25.09. Thus the issue is fully priced and discounts all near term positives.

COMPARISON WITH LISTED PEERS:
As per the offer documents, GLSL has shown Divis Lab, Laurus Labs, Shilpa Medicare, Aarti Drugs and Solara Active Pharma as its listed peers. They are currently trading at a P/E of 65.02, 37.21, 36.99, 25.65 and 27.16 (as of July 20, 2021). However, they are not truly comparable on an apple to apple basis.

DIVIDEND POLICY:
Our Company has not declared or paid any dividend during the three immediately preceding Financial Years and until the date of filing of this Red Herring Prospectus. GLSL will adopt a prudent dividend policy post listing based on its financial performance and future prospects.

MERCHANT BANKER'S TRACK RECORDS:
The six BRLMs associated with this offer have handled 27 public issues in the past three years out of which 8 issues closed below the offer price on the listing date.

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