Alkem IPO: Should You Subscribe

Alkem the 5th largest pharmaceutical company in India by domestic sales is hitting capital market on December 8, what should you do with the issue. Read on to know more about the company and issue.

The Issue
Alkem Laboratories (Alkem), a Mumbai based pharmaceutical company is tapping the capital market with its maiden initial public offering (IPO). It will hit the market on December 8 and will close on December 10.  The company has fixed the price band from Rs 1,020 to Rs 1,050 per equity share of face value of Rs 2. At the lower price band, it would raise Rs 1,311 crore while at upper price band it will mop up Rs 1,350 crore.  The entire offer is made through an offer for sale of up to 1.29 crore equity shares, which constitutes 10.75 per cent stake by the promoters. Since the offer is being made through offer for sale, the company will not receive any proceeds from the offer.

Company
The company was established in 1973 and is a leading Indian pharmaceutical company engaged in the development, manufacturing and sale of pharmaceutical and neutraceutical products. The company produces branded generics, generic drugs, active pharmaceutical ingredients (“APIs”) and Nutraceuticals, which they market in India and 55 countries internationally, however the United States remain their primary market outside India. It has a portfolio of around 800 brands and has a total of 16 manufacturing facilities: 14 manufacturing facilities at 5 locations in India and 2 in the United States. Five of their facilities are USFDA, TGA and UK-MHRA approved. Of the Indian manufacturing facilities, 12 are for manufacturing formulations and 2 for manufacturing APIs.

For the fiscal year 2015, Alkem remains the fifth largest pharmaceutical company in India by domestic sales. What is interesting about the company is that unlike many other Indian pharmaceutical companies that derive majority of sales from USA, it derives the bulk of its revenues from the domestic market (around 75%). You should also note that Indian pharmaceutical industry is growing faster than the US market.  In the USA, company has filed 69 abbreviated new drug applications (ANDAs; of which 21 have received final approval and 30 are Para IV including first-to-file.

Beside the organic route company also has adopted inorganic route to grow. Company has acquired Ascend, in July 2010 which provided it with the commercial platform for the world's largest drug market (USA); in December 2012 it acquired manufacturing assets from Norac Inc in the USA, focused primarily on manufacturing specialty active pharmaceutical ingredients (APIs) and providing contract research and manufacturing services; in June 2009, it acquired a majority stake in Pharmacor Pty Ltd to enter the Australian market.

Alkem also conducts research and development activities at their facilities in Taloja and Bangalore in India and California and St. Louis in the United States. Company has employed 483 scientists working on various drug products and substances in India and the USA. For fiscal year 2015, their revenue expenditure on research and development amounted to 4.5 per cent of the net revenues from operations for the period.

Financials
For the five year ending FY15, total revenue of the company has grown at annual rate of 22.3 per cent and was Rs 3788 crore in FY15. The contribution of the net revenues from the international operations has grown from 12.6 per cent of the net revenues from operations in fiscal year 2011 to 25.3 per cent of the net revenues from operations in fiscal year 2015. For the first half of FY16, company has posted a revenue growth of 36 per cent on yearly basis.  At the end of H1FY16 revenue stood Rs 2570 crore. In terms of operating profit the company has clocked a CAGR of 14.2 per cent between FY11-15. The reported profit in the same period has increased at a CAGR of 11.8 per cent. What has led to such lower growth rate in profit when compared to sales growth was the acquisition made by company in these time and absorption of some of the related cost in the profit and loss account. In the first half of FY16, operating profit and net profit has increased by 150 per cent on yearly basis.

Valuation
On valuation front at the price band of Rs 1020-1050, the issue is available in the price to earnings (PE) of 26.35x – 27.13x for FY15. It is discount to other listed pharma players like IPCA Lab, which is trading at PE of more than 30 times. When compared on EV/EBIDTA basis the issue will be available at 25x, which is in line with the industry peers. Looking at reasonable valuation and expected good growth in financials we advice our readers to subscribe the issue.