Sudarshan Pharma BSE SME IPO review (Avoid)

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Review By Dilip Davda on March 3, 2023

• SPIL is in the business of trading specialty chemicals, and intermediates for the pharma industry.
• It originally planned its maiden IPO in June 2019 but failed to sail through.
• This is the second time it is trying its luck with a more than 10-fold rise in IPO expenses.
• Based on the current financial data, the issue is fully priced and discounts near-term positives.
• There is no harm in skipping this "high-risk/low-return" bet. 

PREFACE:
This company originally tried its luck for the maiden float in June 2019, but after getting just around 47% subscription till the last day, it was withdrawn. At that time the mandate was with First Overseas Capital Ltd. for an IPO of Rs. 24.77 cr. at a price of Rs. 72 per share (at a P/E of around 41) with an estimated issue expense of around Rs. 0.75 cr. and dilution of 26.49%. In this issue offer document, it referred to Torrent Pharma, Alembic, Shilpa Medi., TTK Health and Biocon as their listed peers. 

Now with a different Lead Manager (LM) i.e. Gretex Corporate Services Ltd., it is coming with a book-building process IPO worth Rs. 50.10 cr. with estimated issue expenses of Rs. 7.90 cr. - A whopping rise in expenses indicates the arrangement of IPO funding. For this IPO, it has announced a price band of Rs. 71-Rs. 73 per share. (at a P/E of around 24.33) and a dilution of 28.52%. This offer document has shown Eris, Sigachi and Aarti Drugs as their listed peers.

So even if we compare these two offer documents, the change in LM and list of peers raises major concerns. Almost 10 times hike in issue expenses for the nearly double size of IPO also remains a tricky aspect. Other major concerns are direct tax cases against promoters for Rs. 7.41 cr. (excluding penalty/interest). Its borrowing more than doubled from Rs. 20.81 cr. as of March 31, 2020, to Rs. 49.41 cr. as of September 30, 2022. (refer to pages 24 and 25 of the offer document).

The only plus point is the growth reported in its working. But the asking price fully discounts it with the near-term positives. In fact, the greed in the pricing of the IPO still persists.

ABOUT COMPANY:
Sudarshan Pharma Industries Ltd. (SPIL)was originally incorporated as Sudarshan Specialty Chemsolve Pvt. Ltd. in 2008 and over the period, it changed its name to the current one. It is engaged in the business of specialty chemicals and intermediates for pharma, agrochemicals, coating, paints, adhesives and various other industries. It is also in Active Pharmaceuticals Ingredients (APIs). It is also engaged in the import and export of specialty chemicals. Some products it outsources from manufacturers at its toll manufacturing facilities. 

The company is also involved in contract manufacturing, outsourcing and supply of generic pharma formulations and medicines to healthcare institutions, governments, NGOs, and Hospitals. Most of the products are outsourced from a third party that is approved by FDA, WHO, and other relevant authorities. It normally enters into one to three years contracts for manufacturing agreements.

SPIL has launched a wide product range in pharma formulations such as Setdown, Pulmo relief, Fix Pollen, Flupimac and many more as well as has established goodwill for quality products and has regular clients for the same. It has entered into MOU / Agreements with Storage Houses / Warehouses facility providers at Bhiwandi Thane, Maharashtra, Wada Palghar, Maharashtra and Baddi, Himachal Pradesh for using their premises for the stock keeping of products. 

To develop its export business, the company is in the process of applying for 16 formulation registrations in countries like Ghana, Georgia, Myanmar, Nigeria, Kenya, Malaysia & MINA region. The product registrations will boost exports and Pharma business operations. 

SPIL is planning for business expansion by having its own state-of-the-art manufacturing facility at Mahad along with its mini manufacturing facility at Wada Area, Formulation GMP unit at Tarapur, Maharashtra. It also plans to develop a distributor network & logistic facilities in Mumbai, Delhi, Chennai, Hyderabad and Ahmedabad. This shall also support E-commerce and Online marketing of the company's products. It will be equipped with ultra-modern facilities to execute all types of manufacturing activities from manufacturing intermediates and further API (Active Pharma Ingredients) including Vitamin B6 which is been granted to the company by Government under the PLI scheme. As of November 30, 2022, it had 43 employees on its payroll and also hires contract labour as and when required. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO (a second try) of 6862400 equity shares of Rs. 10 each via book building process to mobilize Rs. 50.20 cr. at the upper cap. It has announced a price band of Rs. 71 - Rs. 73 per share. The issue opens for subscription on March 09, 2023, and will close on March 14, 2023. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 28.52% of the post-issue paid-up capital of the company. SPIL is spending a whooping Rs.7.90 cr. for this IPO process and from the net generation, it will utilize Rs. 32 cr. for working capital and the rest for general corporate purposes. 

Gretex Corporate Services Ltd. is the sole lead manager and KFin Technologies Ltd. is the registrar of the issue. Gretex group company Gretex Share Broking Pvt. Ltd. is the market maker for the company.

Having issued initial equity shares at par, SPIL issued further equity shares in the price range of Rs. 11.00 to Rs.130.00 per share between October 2016 and October 2022. It also issued bonus shares in the ratio of 15 for 1 in September 2016, 7 for 10 in August 2018, and 1 for 2 in November 2022. The average cost of acquisition of shares by the promoters is Rs. 6.76 and Rs. 14.08 per share. 

Post-IPO, SPIL's current paid-up equity capital of Rs. 17.20 cr. will stand enhanced to Rs. 24.07 cr. Based on the upper cap of the IPO price, the company is looking for a market cap of Rs. 175.68 cr. With this capital base, it is coming on SME listing, which also surprises all.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SPIL has posted a turnover/net profit of Rs. 148.00 cr. / Rs. 1.28 cr. (FY20), Rs. 193.73 cr. / Rs. 2.67 cr. (FY21), and Rs. 357.56 cr. / Rs. 5.30 cr. (FY22). For H1 of FY23 ended on September 30, 2022, it earned a net profit of Rs. 3.61 cr. on a turnover of Rs. 195.90 cr. The sudden boost in its bottom lines for the last 18 months raises eyebrows. 

For the last three fiscals, the company has reported an average EPS of Rs. 3.92 and an average RoNW of 13.93%. The issue is priced at a P/BV of 2.21 on the basis of its NAV of Rs. 33.00 as of September 30, 2022, and at a P/BV of 1.80 based on its post-IPO NAV of Rs. 40.65 per share (at the upper cap). 

If we annualize FY23 earnings and attribute it to the post-IPO fully paid-up equity capital base, the asking price is at a P/E of around 24.33. Thus the greed in the pricing of the IPO still persists.

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 Eris Lifesciences, Sigachi Ind., and Aarti Drugs as their listed peers. They are trading at a P/E of 21.62, 18.37, and 22.12 (as of March 03, 2023). However, they are not truly comparable on an apple-to-apple basis. This time, it has shown a different set of peers which raises eyebrows. All these big players are trading at a lower P/E than SPIL. 

MERCHANT BANKER'S TRACK RECORD:
This is the 15th mandate from Gretex Corporate in the last three fiscals (including the ongoing one). Out of the last 10 listings, 2 opened at a discount and the rest were listed at premiums ranging from 0.47 % to 67.71 % on the listing date. It has a poor track record.

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