Sudarshan Pharma NSE SME IPO review (Avoid)

•  SPIL does major operations through third-party contracts.
•  Its offices are on lease. Own plant set up is underway.
•  The issue is priced very aggressively at 41 P/E.
•  Merchant Banker has an average track record so far.
•  Pharma business is high volume/low margin and highly competitive.

ABOUT COMPANY:
Sudarshan Pharma Industries Ltd. (SPIL) is an integrated chemical and pharmaceutical company. It outsources speciality chemicals, intermediates and active pharmaceutical ingredients (APIs). It also deals with contract manufacturing.  Company's office and plants are on lease. The manufacturing facility is taken on leas from the group company.  SPIL also offers services of QC and formulation development to provide customized solutions to its customers and assist them in sourcing the innovative products as per their needs. Its pharma and speciality chemical business operations are supported by various manufacturers having relevant authorities approved facilities. None of the manufacturing contracts or supply contracts is for the long term. The company is selling its products in domestic and international markets. In India, it is present in 5 states through supply chain networks. It has planned manufacturing facility at Wada in Maharashtra.  To develop export business, it is in the process of applying for 16 formulation registrations in various countries.

ISSUE DETAILS /CAPITAL HISTORY:
To part finance its plans to set up dedicated manufacturing facility for pharma business (Rs. 12.50 cr.), distribution and warehousing centre and purchase of corporate office (Rs. 4.50 cr.), additional working capital (Rs. 5.25 cr.) and general corpus fund )Rs. 2.80 cr.) needs, SPIL  is coming out with a maiden IPO of 3440000 equity shares of Rs. 10 each at a fixed price of Rs. 75 per share to mobilize Rs. 25.80 cr. The issue opens for subscription on 12.06.19 and will close on 17.06.19. Minimum application is to be made for 1600 shares and in multiples thereon, thereafter.  Post allotment, shares will be listed on NSE SME Emerge.  Issue constitutes 26.49% of fully diluted equity post issue.  SPIL is spending Rs. 0.75 cr. for this issue process.  The issue is solely lead managed by First Overseas Capital Ltd, while Karvy Fintech Pvt. Ltd. is the registrar to the issue. Safal Capital (India) Ltd. is the market maker for this issue.

Having issued initial equity at par, SPIL raised further equity in the price range of Rs. 11 to Rs. 55 per share between October 2016 and January 2019. It has also issued bonus shares in the ratio of 15 for 1 in September 2016 and 7 for 10 in August 2018. The average cost of acquisition of shares by the promoters is Rs. 9.15 and Rs. 9.78 per share.

Post this issue, SPIL's current paid up equity capital of Rs. 9.55 cr. will stand enhanced to Rs. 12.99 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SPIL has posted turnover/net profits of Rs. 55.52 cr. / Rs. 0.16 cr. (FY17), Rs. 89.76 cr. / Rs. 0.74 cr. (FY18) and Rs. 140.02 cr. / Rs. 2.35 cr. (FY19).  SPIL operates in high volume low margin business. For the last three fiscals, SPIL has posted an average EPS of Rs. 2.63 and an average RoNW of 9.96%. The issue is priced at a P/BV of 3.82 on the basis of its NAV of Rs. 19.63 as on 31.03.19 and at a P/BV of 2.19 on the basis of post issue NAV of Rs. 34.30 per share.

If we consider FY19 earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 41 thus it is priced very aggressively compared to most of the listed peers.

COMPARISION WITH LISTED PEERS:
As per offer documents, it has shown Alembic Ltd., Shilpa Medicare, TTK Healthcare, Biocon and Torrent Pharma as its listed peers. These peers are currently trading at a P/Es of around 27, 24, 38, 100 and 35 respectively (as on 07.06.19). Biocon is quoting at higher P/E due to cum-bonus quotes. However, all of them are not strictly comparable with the model of this company.

MERCHANT BANKER'S TRACK RECORDS:
On merchant banker's front, this is the 13th mandate from its stable. Out of last 10 listings, 5 issues opened at discount to offer price and the rest with a premium s ranging from 1.67% to 25% on the day of listings. Thus it has an average track record.  This is the first big IPO handled by First Overseas.