Remus Pharma NSE SME IPO review (Avoid)

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Review By Dilip Davda on May 13, 2023

•    RPL is in the distribution of pharma products with third-party B2B contracts.
•    Its recent financial performance is non-convincing. 
•    Based on super earnings too, the issue appears fully priced. 
•    IPO valuation is nearly 1.5 times its 9M FY23 top line.
•    There is no harm in skipping this tricky issue.

ABOUT COMPANY:
Remus Pharmaceuticals Ltd. (RPL) is engaged in the marketing & distribution of finished formulations of pharmaceutical drugs. The company also deals in API (Active Pharmaceutical Ingredient). It also provides technical consultancy services to various distributors for the preparation of reports on the dossiers of the products to be registered by them in various countries. 

Having cultivated strong and dependable customer relationships ranging from Generic distributors, regional distributors and Multinational distributors to Hospitals and Clinics through a responsive distribution network, its clients are spread in more than 20 countries. 

The Company is majorly engrossed in the pharmaceutical business involving marketing, trading and distribution of a wide range of pharmaceutical finished formulations and products. Depending upon business requirements, RPL gets finished pharmaceutical formulations manufactured on loan license or contract manufacturing. Such manufacturing is on principle to principle basis. RPL has a presence through registered and/or under-registration products in countries namely Bhutan, Bolivia, Chile, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Kuwait, Madagascar, Malaysia, Hong Kong, Myanmar, Panama, Trinidad and Tobago, Uzbekistan, Venezuela, Vietnam.

The company deals in drug forms like Capsules, Creams, Eye Drops, Gels, Infusions, Inhalation, Inhalers, Injections, Nail Lacquer, Nasal Solution, Nasal Spray, Nebulizers, Ointment, Ophthalmic, Oral Gel, Oral Solution, Oral Suspension, Sachet, Suspension, Tablet.

Its product portfolio consists of 429 products, as on January 31, 2023. The company operates under different brand names across the globe. As on January 31, 2023, it has 295 products registered in a total of 13 countries. As on January 31, 2023, a total of 134 products are under the process of registration in 16 countries, which shall boost the growth of the company. As of January 31, 2023, the company has business-to-business supply agreements with 58 domestic distributors and 139 international distributors for distribution and/or contract manufacturing supply. This company is totally dependent on third-party supply and distribution channels. As of the said date, it has 35 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book-building process IPO to mobilize Rs. 47.69 cr. at the upper end. The company is issuing 388000 equity shares of Rs. 10 each and has announced a price band of Rs. 1150 - Rs. 1229 per share. The issue opens for subscription on May 17, 2023, and will close on May 19, 2023. The minimum application is to be made for 100 shares and in multiples thereon, thereafter. Post allotment shares will be listed on NSE SME Emerge. The issue constitutes 26.34% of the post-IPO paid-up equity capital of the company. The net issue excluding the market maker portion (19500 shares) is allocated as 50% for QIBs (184200 shares), 15% for HNIs (55300 shares), and 35% for Retail investors (129000 shares). 

From the net proceeds of the IPO process, it will utilize Rs. 30.30 cr. for working capital, and the balance for funding investments for acquisition and general corporate purposes. 

The issue is solely lead managed by Beeline Capital Advisors Pvt. Ltd. and Link Intime India Pvt. Ltd. is the registrar of the issue. Sunflower Broking Pvt. Ltd. is the market maker for the company. 

Having issued initial equity at par value, the company issued further equity shares at a price of Rs. 500 per share in December 2022 and has also issued bonus shares in the ratio of 99 for 1 in March 2022. The average cost of acquisition of shares by the promoters is Rs. 0.06, Td. 0.10, and Rs. 9.45 per share. 

Post-IPO, RPL's current paid-up equity capital of Rs. 1.09 cr. will stand enhanced to Rs. 1.47 cr. Based on the upper price band, the company is looking for a market cap of Rs. 181.03 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, as per restated financial data, RPL has posted a turnover/net profit of Rs. 12.77 cr. / Rs. 0.81 cr. (FY20), Rs. 19.22 cr. / Rs. 1.03 cr. (FY21), Rs. 25.44 cr. / Rs. 3.39 cr. (FY22). For 9M of FY23, it earned a net profit of Rs. 6.44 cr. on a turnover of Rs. 33.61 cr. Thus it has posted growth in its top and bottom lines. The sudden boost in bottom lines for FY22 and 9M of FY23 raise eyebrows and concern over sustainability going forward. 

For the last three fiscals, RPL has reported an average EPS of 21.70 and an average RoNW of 44.24%. The issue is priced at a P/BV of 7.79 based on its NAV of Rs. 157.79 as of December 31, 2022. The RHP and the IPO ad are silent on the post-IPO NAV at the upper and lower price band. 

Its RoE and RoCE data has posed inconsistency (refer to page no. 88 of the offer document). The sudden boost in its gross and net profit margins too raise eyebrows and concern over sustainability. Does this company have any magic wand to post such miraculous earnings?

If we annualize FY23 earnings and attribute it to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 21.09. Thus with super profits, it appears fully priced. The tiny paid-up equity capital post-IPO hints at a longer duration for migration.  Valuations are definitely very high with non-convincing earnings on trading activities. IPO float valuation over 1.5 times its latest 9M FY23 topline raises eyebrows. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Trident Lifeline, Vaishali Pharma, and Chandra Bhagat Pharma as their listed peers. They are currently trading at a P/E of 27.51, 23.45 and 123.58 (as of May 12, 2023). However, they are not truly comparable on an apple-to-apple basis. As per the website of designated exchanges, the P/E info is not available as their half-yearly reporting is also not being reflected. 

MERCHANT BANKER'S TRACK RECORD:
This is the 13th mandate from Beeline Capital in the last two fiscals (including the ongoing one). Out of the last 10 listings, 1 opened at par and the rest listed at premiums ranging from 0.39% to 62.38% on the listing date.

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