Sai Life Sciences IPO review (May apply)

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Review By Dilip Davda on December 8, 2024

•    The company is innovation focused CRDMO, NCE, CRO, and CMC entity.
•    It is a global player for healthcare related products development and serving over 25 world's leading pharma companies.
•    It marked steady growth in its top lines, but the sudden boost in bottom lines for FY24 raises eyebrows.
•    Based on FY25 annualized earnings, the issue appears aggressively priced. 
•    Well-informed/cash surplus/risk seekers may park moderate funds for long term.

ABOUT COMPANY:
Sai Life Sciences Ltd. (SLSL) is an innovator-focused, contract research, development, and manufacturing organization ("CRDMO"). It provides end-to-end services across the drug discovery, development, and manufacturing value chain, for small molecule new chemical entities ("NCE"), to global pharmaceutical innovator companies and biotechnology firms. It possesses both (a) discovery / contract research ("CRO") and (b) chemistry, manufacturing, and control ("CMC") / contract development and manufacturing organization ("CDMO") capabilities. It is the fastest-growing Indian CRDMOs among listed Indian peers in terms of revenue CAGR as well as EBITDA CAGR from Financial Year 2022 to Financial Year 2024. (Source: F&S Report).

Its CRDMO platform provides multiple entry points for it to acquire customers in the intermediate stages of their new drug discovery to commercialization journey. SLSL is also one of the few CRDMOs to have a differentiated delivery model of having research laboratories for discovery and development located near overseas innovation hubs at Watertown (Greater Boston, MA), United States ("US") and Manchester, United Kingdom ("UK"), complemented by large-scale research laboratories and manufacturing facilities in cost competitive locations in India. (Source: F&S Report). 

During the Financial Year 2024 and six months' period ended September 30, 2024, it served more than 280 and 230 innovator pharmaceutical companies, respectively, including 18 of the top 25 pharmaceutical companies (in terms of revenue for the calendar year 2023), across regulated markets, including the US, the UK, Europe and Japan. (Source: F&S Report). During both the Financial Year 2024 and six months' period ended September 30, 2024, it also provided CRO services to more than 60 customers, respectively, on an ongoing basis, for their integrated drug discovery programs. As of September 30, 2024, its CDMO product portfolio included more than 170 innovator pharmaceutical products, including 38 products that were supplied for manufacturing of 28 commercial drugs.

It provides services through its globally accredited manufacturing and R&D facilities with quality systems that are supported by a qualified pool of scientists, engineers, and other scientific staff. As of September 30, 2024, it had 2,353 scientific staff, with majority of scientific team holding advanced degrees, including 302 PhDs and 1,475 master's degrees. Its manufacturing facilities have received several regulatory approvals from the United States Food and Drug Administration ("USFDA"), the Pharmaceuticals and Medical Devices Agency, Japan ("PMDA") and the state level drug control departments which are arms of the Central Drug Standards Control Organization, India ("CDSCO"). During the past three Financial Years and the six months' period ended September 30, 2024, its manufacturing units were subject to more than 100 audits by customers. These facilities feature flexible manufacturing setups, including large scale reactors for high-volume products and some production areas specifically designed to accommodate modern drug development pipelines that produce relatively smaller quantities but involve more intricate chemical processes.

As of September 30, 2024, it had 3,135 employees, with capabilities across the CRDMO value chain. The company is supported by an experienced Board and financial investors, including TPG Asia VII SF Pte Ltd and HBM Private Equity India, who have partnered with it since 2018 and 2016, respectively. Its Board is committed to corporate governance principles that ensure accountability, fairness, and transparency in business practices. It is the first India-headquartered Company to become a member of the Pharmaceutical Supply Chain Initiative's ("PSCI") and has also received silver rating sustainability by EcoVadis, a global provider of business sustainability ratings.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route combo IPO worth Rs. 3042.62 cr. (approx. 55421123 shares at the upper cap). The issue consists of fresh equity shares issue worth Rs.  950 cr. (approx.  17304189 shares at the upper cap) and an Offer for same of 38116934 equity shares (worth Rs. 2092.62 cr. at the upper cap). The company has announced a price band of Rs. 522 - Rs. 549 per equity shares of Re. 1 each. The issue opens for subscription on December 11, 2024, and will close on December 13, 2024. The minimum application to be made is for 27 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 26.65% of the post-IPO paid-up equity capital. From the net proceeds of the IPO, the company will utilize Rs. 720.00 cr. for repayment/prepayment of certain borrowings, and the rest for general corporate purposes. 

The joint Book Running Lead Managers (BRLMs) to this issue are Kotak Mahindra Capital Co. Ltd., IIFL Securities Ltd., Jefferies India Pvt. Ltd., Morgan Stanley India Co. Pvt. Ltd., while KFin Technologies Ltd., is the registrar to the issue. Kotak Securities Ltd. is the syndicate members.

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 3.00 - Rs. 190.00 per share (based on Re. 1 FV), between April 2004 and November 2024. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.51, Rs. 0.82, Rs. 1.00, Rs. 1.35, Rs. 1.74, Rs. 4.17, Rs. 4.27, Rs. 5.00, Rs. 5.74, Rs. 5.92, Rs. 6.78, Rs. 10.11, Rs. 10.40, Rs. 42.71, Rs. 68.20, Rs. 127.27, Rs. 127.30, and Rs. 175.48 per share. 

Post-IPO, its current paid-up equity capital of Rs. 19.07 cr. will stand enhanced to Rs. 20.80 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 11418.63. 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. 897.74 cr. / Rs. 6.23 cr. (FY22), Rs. 1245.11 cr. / Rs. 9.99 cr. (FY23), and Rs. 1494.27 cr. / Rs. 82.81 cr. (FY24). For H1 of FY25 ended on September 2024, it earned a net profit of Rs28.01 cr. on a total income of Rs. 693.35 cr. The sudden boost in its bottom lines from FY24 onwards raises eyebrows.

For the last three fiscals, the company has posted an average EPS of Rs. 2.53 (basic) and an average RoNW of 4.74 %. The issue is priced at a P/BV of 9.82 based on its NAV of Rs. 55.93 as of September 30, 2024, and at a P/BV of 5.74 based on its post-IPO NAV of Rs. 95.62 (at the upper cap). 

If we attribute FY25 annualized earnings to its post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of 204.09, and based on FY24 earnings, the P/E stands at 137.94. Thus the issue appears aggressively priced. 

For the reported periods, the company has posted PAT margins of 0.72% (FY22), 0.82% (FY23), 5.65% (FY24), 4.15% (H1-FY25), and RoCE margins of 3.21%, 5.13%, 10.26%, 3.90% respectively for the referred periods.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It has already adopted a dividend policy in July 2024, 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, Syngene Intl., as their listed peers. They are trading at a P/E of 88.6, 136, and 80.3 (as of December 06, 2024). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The four BRLMs associated with the offer have handled 67 pubic issues in the past three fiscals, out of which 17 issues closed below the offer price on the listing date. 

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