Windlas Bio IPO review (May apply)

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Review By Dilip Davda on July 29, 2021

•    WBL is one of the top five formulations of CDMO in India.
•    It has posted growth in top lines but cleaning of slate resulted in declined earnings.
•    Its current valuations discount all near term positives.
•    Ongoing revamping process will take around two years to be on stream.
•    It's a pure long term bet for cash surplus investors.

ABOUT COMPANY:
Windlas Biotech Ltd. (WBL) is amongst the top five players in the domestic pharmaceutical formulations contract development and manufacturing organization ('CDMO') industry in India in terms of revenue (Source: CRISIL Report). With over two decades of experience in manufacturing both solid and liquid pharmaceutical dosage forms and significant experience in providing specialized capabilities, including, high potency, controlled substances and low-solubility, it provides a comprehensive range of CDMO services ranging from product discovery, product development, licensing and commercial manufacturing of generic products, including complex generics, in compliance with current Good Manufacturing Practices ('GMP') with a focus on improved safety, efficacy and cost. In Fiscal 2020, its market share was approximately 1.5% in terms of revenue in the domestic formulations CDMO industry (Source: CRISIL Report). In addition to providing services and products in the CDMO market, the company also sells own branded products in the trade generics and OTC markets as well as export generic products to several countries.

The prevalence of chronic diseases in India has been increasing in the last few years, specifically in certain key therapeutic categories, such as, anti-diabetic, cardiovascular, neuropsychiatry and respiratory therapies, that are treated with 'multi-drug therapy' by physicians, i.e. the specific use of two or more drugs for single or multiple chronic conditions in an individual. Moreover, multi-drug therapy has gained importance over the past few years in the healthcare sector and is expected to aid the growth of pharmaceutical consumption. (Source: CRISIL Report)

WBL's focus has currently been on launching new complex generic products in the chronic therapeutic category linked to lifestyle-related disorders. Its complex generic products portfolio primarily comprises fixed dosage combinations, fixed dosage plus modified-release combinations, customized generics and chewable or dispersible.

The complex generic products market has a high barrier to entry as these products are generally difficult to develop and require special know-how from the development and manufacturing perspective compared to conventional generic products (Source: CRISIL Report).

WBL has three distinct strategic business verticals ('SBVs'): (i) CDMO Services and Products; (ii) Domestic Trade Generics and over-the-counter ('OTC') Brands; and (iii) Exports.

ISSUE DETAILS/CAPITAL HISTORY:
To part finance its plans for the purchase of equipment for expansion projects (Rs. 50.00 cr.), working capital (Rs. 47.56 cr.), repayment/prepayment of certain borrowings (Rs. 20.00 cr.) and general corpus fund needs, WBL is coming out with a maiden book building process equity issue worth Rs. 401.54 cr. It has fixed a price band of Rs. 448 - Rs. 460 per share having a face value (FV) of Rs. 5 each. The issue opens for subscription on August 04, 2021, and will close on August 06, 2021. Minimum application is to be made for 30 shares and in multiples thereon, thereafter. The issue consists of a fresh equity issue worth Rs. 165.00 cr. (approx. 3586950 shares) and an offer for sale of 5142067 equity shares (Rs. 236.54 cr. at the upper cap). At the upper price band of the issue, WBL will issue totally 8729017 shares including a fresh equity issue. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 40.05 % of the post issue paid-up capital of the company.

The Book Running Lead Managers (BRLMs) to this offer are SBI Capital Markets Ltd., DAM Capital Advisors Ltd. and IIFL Securities Ltd., while Link Intime India Pvt. Ltd. is the registrar to the issue.

Having issued initial equity at par, the company has raised further equity in the price range of Rs. 290.66 to Rs. 424.99 (for FV of Rs. 5) between November 2015 and December 2018. It has also issued bonus shares in the ratio of 2 for 3 in November 2008 and 4.2 for 10 in April 2021.

The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. NIL, Rs. 2.75, / Rs. 0.021 and Rs. 204.69 per share.

Post issue, WBL's current paid-up capital of Rs. 9.10 cr. will stand enhanced to Rs. 10.90 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 1002.54 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, on a consolidated basis, WBL has posted a total turnover/net profit of Rs. 311.53 cr. / Rs. 63.82 cr. (FY19), Rs. 331.34 cr. / Rs. 16.21 cr. (FY20) and Rs. 430.70 cr. / Rs. 15.57 cr. (FY21). WBL has posted declining trends for bottom lines despite growth in top lines. According to management, while its gross profits for all years have shown growth, but accounting adjustments of gains/losses of joint ventures and impairment of Goodwill resulted in the decline of net profits. In the process to clean its slate, it has taken a hit. It is now in the process of revamping all these which will take about two years and thereafter it will be on a fast forward mode.

For the last three fiscals, WBL has (on a consolidated basis) posted an EPS of Rs. 13.59 and a RoNW of 13.27 %. The issue is priced at a P/BV of 4.21 based on its NAV of Rs. 109.36 as of March 31, 2021, and at a P/BV of 2.75 based on its post-issue NAV of Rs. 167.07 (at the upper price band).

Based on adjusted FY21 earnings to fully diluted post issue equity, the asking price is at a P/E of around 64+. The company has posted a CAGR of around 38% in top-line and 58% in gross margins for the last three fiscals.

COMPARISON WITH LISTED PEERS:
As per offer documents, WBL has no listed peers to compare with.

DIVIDEND POLICY:
The company does not have a formal dividend policy as of the date of this Red Herring Prospectus. Further, it has not declared dividends on the Equity Shares during the current Fiscal and the last three Fiscals. It will follow a prudent dividend policy post listing based on its financial performance and future prospects.

MERCHANT BANKER'S TRACK RECORDS:
The three BRLMs associated with the offer have handled 27 issues in the past three fiscals (including the ongoing one) out of which 12 issues closed below the issue price on the listing date.

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