by Welcome back to Traders Ideology, In this article, we will do a fundamental analysis of Supriya Lifescience. If you have been reading my articles you would know that I strongly believe that upcoming IPO’s can generate the next set of multibagger stocks.
Disclaimer: This article is only for educational purposes. I do not recommend buying or sell so please consult your advisor and do your own research before investing.
Also, Read: Fundamental Analysis of IRCTC & Fundamental Analysis of DMART
Introduction
- Supriya Lifesciences manufactures Active Pharmaceuticals Ingredients or APIs for the pharma industry.
- It makes 38 APIs to serve different therapeutic segments- antihistamine, analgesic, anesthetic, vitamin, anti-asthma, and anti-allergic.
- The company’s products are exported to 1296 customers in 86 countries through 346 distributors.
- This company is Active Pharmaceutical Ingredients means it makes APIs & do supply them. It is a well-known company in the country, you can call it a leader company & the use of API in what? for manufacturing of medicines.
- This company makes 38 APIs in different-different categories: It is the biggest exporter of chlorpheniramine maleate & Ketamine, Hydrochloride in India.
- In which India contributes 45% to 50%and 60%-65% respectively in this product& it is the data of 2017 to 2021 this company is also one of the biggest exporters of salbutamol sulfate.
- In the financial year 2021, the total export of APIs contributes almost 31% of total export.
- At this point, you understood that this company is not a bad company.
- It contributes much in its field then it will definitely not disappoint you and company will be good.
- The product of this company has been licensed in America & Europe & in many markets from 1st April 2021 to 31st October 2021.
Fundamental analysis of Supriya Lifesciences
Fundamental analysis of Supriya Lifesciences are as follows:
Revenue Breakdown
- In FY21, 77.47% of its revenue came from exports.
- The FY21 geographic revenue distribution of Supriya Lifesciences was:
- Asia (excluding India): 29.27%
- India: 22.53%
- Latin America: 19.15%
- Europe: 17.4%
- North America: 4.76%
- The company’s only manufacturing facility is located at Parashuram Lote, Maharashtra, which is 250 km from Mumbai.
- The reactor capacity at this facility is 547 KL per day.
- The company also has an additional land of 12,551 square meters for future expansion near the same facility.
- It is the largest exporter of Chlorpheniramine Maleate & Ketamine Hydrochloride Molecules with a market share of 72% and 58% in FY21.
- It has a 30-40% market share in the exports of Salbutamol Sulfate and a 25-30% market share in the exports of Vitamin B2 (Riboflavin, Lactoplavin).
- Supriya Lifesciences is providing an exit from the IPO to the existing shareholders.
- With the fresh proceeds, the company intends to finance its Capex planning and debt repayment.
Risk Factors
- The company’s mostly IPO has a 500 crore offer for sales so this amount is not for the company.
- It is for shareholders who will sell the shares.
- company’s most revenue comes from only a few products if the demand for these products will low then it affects badly on their revenue.
- The revenue of the company is also generated from some big clients if the company’s relation will fail with the client then its sale affects its revenue like they have more international operation than management, legal, taxes risks are also more.
Strengths and Limitations
Strengths and Limitations are as follows:
Strengths
- Now let’s talk about the investment pros.
- The biggest advantage of the company is that the manufacturing of the majority of its products is backward integrated.
- Backward Integrated Molecules generated 67% of revenue in FY21.
- With this backward integration, the company gets a lot like. To be independent of external sources for sourcing of raw materials
- Being shielded from volatility in raw material costs Assurance of quality & availability of raw material under control
- Backward integration is a huge advantage in the pharma industry where 70-80% of the raw material required for the industry is imported
- And the cost of raw materials accounts for 45-55% of the total expenditure.
- Indian market is less in the healthcare sector than other countries
- There are many growth drivers for India’s pharma industry-
- Rising life expectancy and changing demographics Rising income levels and health insurance penetration
- low-cost manufacturing capability
- The bulk pharmaceutical industry in India is expected to reach a market size of Rs 1.85 lakh crore with a CAGR of 11.5-12.5% from 2021 to 2025.
- The pharma industry has great potential for import substitution especially for API sourcing in formulations
- It is also being promoted in the Atmanirbhar Bharat and Pharma PLI schemes of the Government of India.
- It is highly recommended for backward integrated API makers like Supriya in the future.
Limitations
- Now let’s talk about the investment cons.
- The top 3 and top 5 products generate 50% and 64% of the revenue in the company’s FY21.
- Supriya has a product concentration risk where a market decline in any of top 3 or 5 products can result in a huge loss to its performance & earnings.
- Similarly, 21.6% and 40.1% of revenue miles in FY21 from the company’s top 3 and top 10 customers.
- If they have got work business from their top customers or the association ends, then there can be a lot of loss.
- It does not enter into long-term contracts with any customer who does not have the assurance and contract protection of minimum demand or product sales.
- The pharma sector is a highly regulated industry, and export companies have to obtain regulatory approval
- From the drug regulatory body of each export destination(such as the FDA in the USA) before starting exports.
- These regulatory approvals are strict and time-consuming, and any non-compliance or inspection failure can result in huge losses.
Supriya Lifesciences Financials
- Now let’s talk about the financials.
- On your screen, all the figures are in crores and we will compare FY20 with FY21.
- Total Assets increased from 336.43 to 445.82 crores in FY21.
- Total Revenue increased from 332.71 to 396.22 crores.
- Profit after Tax has also shown an increase from 73.4 to 123.823crores.
- If we see some important ratios, then Net profit margin is 31.25% Operating profit margin is 43.26%
- Earning per share is 16.92.
- P/E is 16.19.
- Industry PE is 21.
- Debt to equity is 0.5.
- The current ratio is 2.10.
- 2-year sales CAGR is 17.73% 2-year profit CAGR is 77.24%.
Future Growth Prospects
- Over the last three to four years, we have seen growing revenue at a CAGR of almost 18%. I think because the business model is completely derisked and the company has very strong fundamentals, whatever percentage of growth we have seen in the last three-four years should continue going forward.
- So the company is very positive on the growth outlook head but let us talk specifically about your EBITDA margins in FY21. We saw a really good jump and the margins were above 40%.
- Even in the first half of FY22, you managed to hold them quite well above that mark. Going forward, should investors expect these margin levels to sustain? What is fuelling that growth?
- Well as far as the EBITDA margins are concerned, in the last three-four years, company have constantly maintained the 40% plus EBITDA margin and this is mainly because of the company’s focus on penetrating into more regulated markets where company are able to get a much better average selling price for the existing products.
- It is not a result of any kind of shortage or disruption. It is a very focussed strategy that the company has. The numbers would be sustainable going forward.
What are the opportunities for growth? What are the products that you can add in the future? Which are the other segments that you would look at?
- The company will be keen to add more and more APIs into existing therapeutic categories. We are also considering new therapeutic categories that might come into our basket in the future.
- There are different therapeutic categories like decongestants, anti-gout, xanthine derivatives, and more vitamin derivatives. We would be focusing on some of the anti-anxiety therapies.
Twelve of the existing products are backward integrated and contribute about 65% of the total revenue. How do you plan to add more to this list?
- Whichever product we start, the principle of the companies is that we would like to be backward integrated for those products.
- Recently, we were having some capacity constraint issues and that is why we have added a new production block.
- With the new capacity enhancements that we are planning to do,definitely for the rest of the products also we would be backward integrating.
Conclusion
- Overall if we conclude, Supriya Lifescience is in the business of Active Pharmaceutical Ingredientsmeans it makes APIs & do supply them. It is a 20 plus-year-old company with very experienced management.
- The company is vertically integrated with the in-house development of ApIs products and solutions right from design to manufacturing.
- Financially the company is looking very strong. Hence on fundamentals, I would rate it 9 out of 10.
- Future Growth Prospects of the company is also good. Hence, keeping the high earning potential in mind on valuation. I would rate supriya lifesciences for 8 out of 10. Overall, it is worth, for long-term wealth creation.
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