Mankind Pharma IPO review (May apply)

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Review By Dilip Davda on April 19, 2023

•    MPL is engaged in pharmaceutical products with a major focus on domestic markets.
•    It marked growth in its top and bottom lines from FY20 to FY22.
•    The company suffered a minor setback due to one-time adjustments of its recent takeovers.
•    Based on its recent financial performance the issue appears fully priced. 
•    Investors may consider parking funds for the long term as this is a long racehorse.

ABOUT COMPANY:
Mankind Pharma Ltd. (MPL) is India's fourth largest pharmaceutical company in terms of Domestic Sales and third largest in terms of sales volume for MAT December 2022 (Source: IQVIA Dataset, IQVIA TSA MAT December 2022 Dataset for India (For FY20-22)). The company is engaged in developing, manufacturing and marketing a diverse range of pharmaceutical formulations across various acute and chronic therapeutic areas, as well as several consumer healthcare products. 

MPL is focused on the domestic market, as a result of which its revenue from operations in India contributed to 97.60% of total revenue from operations for the Financial Year 2022, which was one of the highest among peers identified by IQVIA (being key pharmaceutical companies operating in similar therapeutic areas, as highlighted in "Industry Overview" on page 158) ("Peers Identified by IQVIA") (Source: IQVIA Report). It operates at the intersection of the Indian pharmaceutical formulations and consumer healthcare sectors with the aim of providing quality products at affordable prices and has an established track record of building and scaling brands in-house. The company has created 36 brands in the pharmaceutical business that have each achieved over Rs. 50 cr. in Domestic Sales for MAT December 2022 (Source: IQVIA Dataset, IQVIA TSA MAT December 2022 Dataset for India (For FY20-MAT Dec 22)). 

MPL has one of the largest distribution networks of medical representatives in the Indian pharmaceutical market ("IPM") and over 80% of doctors in India prescribed its formulations for MAT in December 2022 (Source: IQVIA Dataset, annual filings by respective companies with stock exchanges, IQVIA Medical Audit MAT Dec 2022 for MAT Mar'20-22 and MAT Dec'22), which has assisted MPL in establishing its brands in India.

MPL's Domestic Sales grew at a compounded annual growth rate ("CAGR") of approximately 12% from approximately Rs. 6094 cr. to approximately Rs. 8390 cr. which is approximately 1.3 times that of the IPM, which grew at a CAGR of approximately 10% from approximately Rs. 1,503 cr. to approximately Rs. 1,938 cr. over the same period (Source: IQVIA Dataset, IQVIA TSA MAT December 2022 Dataset for India (For FY20-22)). The company is present in several acute and chronic therapeutic areas in India, including anti-infectives, cardiovascular, gastrointestinal, anti-diabetic, neuro/CNS, vitamins/minerals/nutrients and respiratory. The company entered the consumer healthcare industry in 2007 and has since established several differentiated brands in the condoms, pregnancy detection, emergency contraceptives, antacid powders, vitamin and mineral supplements and anti-acne preparations categories.

MPL has a Pan-India marketing presence, with a field force of 11,691 medical representatives and 3,561 field managers, as of December 31, 2022. It has also established a significant distribution network in India and, during the nine months that ended December 31, 2022, it sold products to over 12,000 Stockists and engaged with 75 clearings and forwarding ("C&F") agents. 

It operates 25 manufacturing facilities across India and had 4,121 manufacturing personnel as of December 31, 2022.  As of December 31, 2022, the Company had a team of over 600 scientists and a dedicated in-house R&D centre. Some of its largest-selling popular brands are Manforce Condoms, Prega News, Gas-O-Fast, Nurokind, Telmikind, Dydroboon, etc.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden secondary offer i.e. OFS (Offer for Sale) of 40058844 equity shares of Re. 1 each via book-building mode. It has announced a price band of Rs. 1026 - Rs. 1080 per share and at the higher cap, it mulls raising Rs. 4326.36 cr. The issue opens for subscription on April 25, 2023, and will close on April 27, 2023. The minimum application is to be made for 13 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 10% of the post-IPO paid-up capital of the company. The company has allocated 50% for QIBs, 15% for HNIs and 35% for Retail investors. This being a secondary offer, no fund is going to the company. The issue is being made to provide an exit to some of its stakeholders and unlock the listing benefits. 

The joint Book Running Lead Managers (BRLMs) to this issue are Kotak Mahindra Capital Co. Ltd., Axis Capital Ltd., IIFL Securities Ltd., Jefferies India Pvt. Ltd., and J.P. Morgan India Pvt. Ltd. and KFin Technologies Ltd. is the registrar of the issue. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 7.50 to Rs. 83.41 (based on Re. 1 FV) between March 2000 and April 2007. It has also issued bonus shares in the ratio of 1 for 1 in March 2000, 15 for 1 in March 2005, 3 for 8 in March 2009, 7 for 20 in August 2010, and 1 for 1 in June 2017. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. Negligible, Rs. NIL, Rs. 276.34, and Rs. 550.44 per share. 

This being a pure OFS, MPL's current paid-up equity capital of Rs. 40.06 cr. (400588440 shares) will remain the same. At the upper cap of the issue price, the company is looking for a market cap of Rs. 43263.55 cr. 

According to management, they are having around 79% stake and diluting just 2.5% by OFS in this offer. As it will have 76.5% holding post this IPO, it will dilute a minuscule stake within 3 years as per listing requirements. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, MPL has (on a consolidated basis) posted a turnover/net profit of Rs. 5975.65 cr. / Rs. 1056.15 cr. (FY20), Rs. 6385.38 cr. / Rs. 1293.03 cr. (FY21), and Rs. 7977.58 cr. / Rs. 1452.96 cr. (FY22). For 3Qs of FY23 ended on December 31, 2022, it earned a net profit of Rs. 1010.19 cr. on a turnover of Rs. 6777.82 cr. 

For the last three fiscals, MPL has (on a consolidated basis) posted an average EPS of Rs. 32.71 and an average RoNW of 25.51%. The issue is priced at a P/BV of 6.05 based on its NAV of Rs. 178.38 as of December 31, 2022, as well as post-IPO. As of December 31, 2022, its current paid-up equity capital of Rs. 40.06 cr. is supported by free reserves of Rs. 7105.83 cr. 

As per financial data, it has suffered a minor setback in the bottom line for 3Qs of FY23. According to the management, this is attributed to its one-time adjustments for the recent takeovers and sluggish global trends following the Russia-Ukraine war. Management is confident of regaining its established trends of earnings post streamlining the operations. It will continue its focus on the domestic market as India is the biggest consumer of quality and affordable healthcare products. 

If we annualize FY23 earnings and attribute it to the post-IPO paid-up capital of the company, the issue is priced at a P/E of around 32.13. Thus prima facie the issue appears fully priced.

DIVIDEND POLICY:
The company paid a total dividend of 755% for FY20 and thereafter, it skipped. It will adopt a prudent dividend policy post-listing of its shares based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, MPL has shown Sun Pharma, Cipla, Zydus Lifescience, Torrent Pharma, Alkem Lab, JB Chemicals, Eris Lifesciences, IPCA Lab, Abbott India, GSK Pharma, Dabur India, Procter & Gamble Health, Zydus Wellness as their listed peers. They are currently trading at a P/E of 167.56, 26.18, 40.74, 51.47, 41.76, 42.95, 21.16, 38.80, 51.98, 12.46, 64.36, 33.56, and 189.76 (as of April 19, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The five BRLMs associated with the offer have handled 84 public offers in the past three fiscals, out of which 29 offers closed below the IPO price on the listing date. 

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