History repeating itself? Generics in 2009 and Life Sciences in 2021!
| GLENMARK LIFE OFFER AT A GLANCE | |
| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 1060 Cr |
| Offer for Sale | 63,00,000 Shares |
| Face Value | Rs 2 |
| Price Band | Rs 695 – 720 |
| Mkt/Bid Lot | 20 Nos. |
| Implied M-Cap | Rs 8,822 Cr |
| Implied Equity Cap | Rs 21.51 Cr |
| Free Float | 17.16% |
| Lead Manager | Kotak, BofA Sec, Goldman Sachs,
DAM Cap, BOB Cap, SBI Cap |
| Registrar | KFin Technologies |
| Listing At | BSE, NSE |
|
INDICATIVE ISSUE SCHEDULE |
|
| Opening :27-Jul-2021 | Closing :29-Jul-2021 |
| Allotment :03-Aug-2021 | Refunding :04-Aug-2021 |
| Demat Credit :05-Aug-2021 | Trading :06-Aug-2021 |
The Offer
Glenmark Life Sciences Ltd (GLS) from the Glenmark stable, controlled by the Mumbai-based Saldanhas, is going public with an IPO of Rs 1,514 cr. The offer consists of a fresh issue of Rs 1,060 cr and an offer for sale of 63 lakh shares (valued Rs 454 cr at the cap price). The offer is being made through the book-building route with a price band of Rs 695-720 for Rs 2 paid-up share. The quantum of offer works out to about 210 lakh shares.
Applicants should bid for a minimum lot of 20 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on August 6, 2021. Kotak Mahindra Capital, BofA Sec, Goldman Sachs, DAM Cap, BOB Cap and SBI Cap are acting as managers to the offer and KFin Technologies has been roped in as registrar to the issue. The bidding opens on Tuesday, July 27 and closes on Thursday, July 29, 2021.
The company proposes to utilize the net proceeds to the tune of Rs 800 cr towards payment of outstanding purchase consideration to the promoter for the spin-off of the API business from the promoter into GLSL pursuant to the Business Purchase Agreement dated October 9, 2018. About Rs 152 cr is earmarked for funding the company’s capital expenditure requirements of three fiscals (Rs 66 cr in FY22, Rs 40 cr in FY23 and Rs 46 cr in FY24). The balance is to be spent for general corporate purposes. However, the project cost and related fund requirements have not been appraised by any bank or financial institution.
Lineage
The Glenmark group is not new to the investing public. The flagship of the Group, 1977-registered Glenmark Pharmaceuticals Ltd (GPL), went public in December 1999 with an IPO of 26.7 lakh shares of Rs 10 each at a premium of Rs 190 a share amounting to Rs 53.4 cr. GPL’s issue received an overwhelming response and was subscribed 64 times. Today, its Re 1 paid-up share is quoting at about Rs 650. Besides fabulous capital appreciation, the company has also rewarded the shareholders with sizable dividends, the last two being 250%, which gives 12.5% yield on the IPO price. Surprisingly, the promoters are holding only a minority stake of 46.63% in GPL’s equity of Rs 28 cr.
Notwithstanding the rich returns that GPL has offered to its IPO investors, the stock is valued only at a moderate Price-Earnings multiple of about 11 times its standalone profit. The reason for this lack-luster discounting is not far to fetch. The promoters have a penchant for floating too many companies. Further, they constantly indulge in reorganization/amalgamation which has made investing public skeptical.
GPL promoters’ reorganization moves and floating of too many subsidiaries have in fact resulted in a drag on the company’s profitability. Look at GPL’s financials. Its standalone net profit was Rs 1,649 cr in FY2021 on Rs 7,451 cr revenue. But its consolidated net profit was much lower at Rs 970 cr despite consolidated revenue being higher at Rs 10,806 cr! In other words, the subsidiaries’ which contributed about Rs 3,350 cr revenue incurred a loss of Rs 679 cr! No wonder, GPL is poorly discounted among the leading pharma players. Glenmark group currently has more than 40 entities. In last three years, two of the foreign subsidiaries have gone into liquidation.
Ever since GPL went public, instead of consolidating, the promoters seem to have diluted the growth prospects of the public company. A year after listing its share, GPL created a subsidiary in the name of Glenmark Laboratories Ltd (GLL) for formulation business. Subsequently, this was spun off into a standalone entity and rechristened as Marksans Pharma Ltd facilitating the younger sibling, Mark Saldanha, to take control of it. This company was listed via back door by amalgamating with another listed company TASC Pharmaceuticals in 2005.
GPL had another subsidiary in the name of Glenmark Organics Ltd since 1994 which was engaged in the business of active pharmaceutical ingredients (APIs). This company’s name was changed to Glenmark Generics Ltd (GGL) in November 2007 and its authorized capital was significantly increased from Rs 5 cr to Rs 50 cr. A Business Transfer Agreement was made on December 24, 2007 between GPL and GGL under which GPL transferred its generics business to GGL with effect from April 1, 2008 for a purchase consideration of Rs 750 cr which was payable on or prior to December 31, 2009. In terms of the Agreement, GGL was required to pay interest at the rate of 12% pa from January 2009 on the principal amount outstanding.
Meanwhile in July 2008 another company of the group engaged in similar line of business, G M Pharma Ltd, was amalgamated with GGL and authorized capital was further increased to Rs 88 cr as Rs 38 cr worth of shares were to be issued to the shareholders of G M Pharma. In July 2009 GGL’s authorized capital was increased to
Rs. 200 cr and the company issued 7.15 cr shares (paid-up value Rs 71.51 cr) valued at Rs 715 cr to GPL towards the purchase consideration as per the December 2007 business transfer agreement.
Until fiscal 2008, GGL was a loss making company without any revenue. But, in fiscal 2009, in view of two amalgamations, the company could post a net profit of Rs 104 cr on Rs 864 cr revenue. With just one year’s performance, GGL filed a draft red herring prospectus (DRHP) in September 2009 for making a fresh public issue of Rs 575 cr. The main object of GGL’s public issue was out of ordinary. GGL proposed to fund Rs 480 cr equity investment in its wholly owned subsidiary, Glenmark Generics Finance S.A., Switzerland which, in turn, had entered into a share purchase agreement dated June 2, 2008 with Glenmark Holding S.A., Switzerland, a Group Company, to purchase 215,600,000 ordinary shares of Glenmark Generics Holding S.A., a subsidiary of Glenmark Generics Finance S.A., Switzerland.
The presence of former SEBI Chairman, D R Mehta, on GGL’s board would have helped the company to get the SEBI nod for the IPO. But, the IPO never came up. GGL was eventually amalgamated back with the parent company GPL in fiscal 2015. Twelve years after the Glenmark Generics debacle, the promoters of Glenmark are now repeating a similar exercise!
GLENN-MARK COMPANIES AT A GLANCE
|
Financials |
Standalone |
Consolidated |
|||
| (Amount in Cr) | Glen Life | Glen Phar | Marksans | Glen Phar | Marksans |
| Market Cap | 8822 | 18846 | 3555 | 18846 | 3555 |
| Fixed Assets | 579 | 1584 | 111 | 4176 | 240 |
| Revenue | 1885 | 7451 | 600 | 10806 | 1376 |
| Other Income | 1 | 396 | 31 | 50 | 7 |
| EBIDTA | 592 | 2360 | 145 | 2179 | 346 |
| Interest | 88 | 266 | 5 | 353 | 8 |
| Net Profit | 352 | 1649 | 98 | 970 | 239 |
| Equity Cap | 25 | 28 | 41 | 28 | 41 |
| Reserves | 1788 | 14781 | 559 | 7036 | 846 |
|
Stock Features |
|||||
| Current Price (Rs) | 720 | 668 | 87 | 668 | 87 |
| Face Value (Rs) | 2 | 1 | 1 | 1 | 1 |
| Book Value | 148 | 525 | 15 | 250 | 22 |
| Promoter Stake % | 82.84 | 46.63 | 48.25 | 46.63 | 48.25 |
|
Profitability |
|||||
| OPM % | 31.4 | 26.4 | 19.0 | 19.7 | 24.7 |
| Net Margin % | 18.6 | 21.0 | 15.6 | 8.9 | 17.2 |
| Cash EPS | 31.42 | 63.80 | 2.77 | 50.10 | 6.71 |
| Earnings Per Share | 28.69 | 58.46 | 2.40 | 34.38 | 5.83 |
|
Return |
|||||
| RONW % | 46.7 | 11.1 | 16.4 | 13.7 | 26.9 |
| ROCE % | 74.2 | 12 | 21.6 | 15.1 | 34.3 |
|
Discounting |
|||||
| Price/Earnings | 25.1 | 11.4 | 36.1 | 19.4 | 14.9 |
| Price/Cash EPS | 22.9 | 10.5 | 31.3 | 13.3 | 12.9 |
| Price/Book Value | 4.9 | 1.3 | 5.9 | 2.7 | 4.0 |
| Price/EBIDTA | 14.9 | 8.0 | 24.5 | 8.7 | 10.3 |
| Price/Revenue | 4.7 | 2.5 | 5.9 | 1.7 | 2.6 |
| Price/Fixed Assets | 15.2 | 11.9 | 32.1 | 4.5 | 14.8 |
Like Glenmark Generics, Glenmark Lifesciences too was created in an uncommon way. Through a share purchase agreement in July 2018 for a paltry sum of Rs 3 lakh, Glenmark Pharmaceuticals (GPL) bought shares of a dormant private limited company Zorg Laboratories, incorporated in June 2011 at Pune, and the name of the company was immediately changed to ‘Glenmark Life Sciences (GLS).
In October 2018, GLS entered into a business purchase agreement with GPL (promoter-company) pursuant to which the API business of GPL was spun off into GLS on a slump sale basis for an aggregate consideration of Rs 1,162.19 cr. GLS was required to pay the purchase consideration within a period of 120 days and any delay was subject to additional interest on the total amounts outstanding. The date for payment of consideration and the terms of payment (including the interest rate) have been amended from time to time. Pursuant to a letter of extension dated March 31, 2021, the period of payment of the purchase consideration was extended to March 31, 2022. As of July 9, 2021, an amount of Rs 800.83 cr (inclusive of interest) was outstanding and this amount is proposed to be paid out of the net proceeds of the present offer.
Key Management
Promoter GPL’s Chairman & Managing Director Glenn Saldanha (51) is the Chairman of GLS. Another senior executive of GPL, V S Mani (56), is a non-executive director in GLS. Yasir Rawjee (55) is the Managing Director and Chief Executive Officer of GLS. Prior to joining the company, he was the head of global API operations at Mylan Laboratories. He was also the senior vice president at Matrix Laboratories and has worked with GlaxoSmithKline in the USA. Sumantra Mitra(46), who has been associated with GLS since October 11, 2018 is the executive director and vice president – human resources. Earlier he had worked with Nilkamal, Mahindra & Mahindra and Glenmark Pharmaceuticals.
Stakeholders
The entire pre-IPO equity of Rs 21.56 cr is held by Glenmark Pharmaceuticals. Post public issue, the 53.37% publicly held GPL will control a big junk of 82.84% of GLS’ enlarged equity (Rs24.51 cr) at an average cost of Rs 44.54 negative!
Business & Financials
GLS reportedly operates four manufacturing facilities with an aggregate annual installed capacity of 726.6 KL. The company intends to increase its API manufacturing capabilities by enhancing the existing production capacities at its Ankleshwar facility during the fiscal 2022 and at Dahej facility during the financial years 2022 and 2023. Also, GLS intends to develop a new manufacturing facility in India for the manufacture of APIs from the financial year 2022 which is expected to become operational in the fourth quarter of fiscal 2023. The new facility is expected to provide a platform for the growth of GLS’ CDMO (contract development and manufacturing organization) business and also add capacity for generics API business.
Even though GLS’ financials look impressive, the company has the risk of depending on a limited number of key customers for a significant portion of its revenues. For the financial years 2021, 2020 and 2019, five largest customers for each respective period accounted for 56%, 57% and 54% of the operating revenue and the promoter (GPL) was its largest customer for each of these periods. For the financial years 2021, 2020 and 2019, revenue from sales to GPL and associates accounted for 40.9%, 41.0% and 39.9%.
As regards GLS’s financials, the company notched Rs 1,885 cr revenue and netted a profit of Rs 352 cr in fiscal 2021 against its present equity capital of Rs 21.56 cr. Even on the post-IPO capital of Rs 24.51 cr the existing bottom line looks very attractive. Once the purchase consideration liability to GPL is settled out of the IPO proceeds, GLS’s finance cost will decrease significantly which should boost the company’s bottom line beyond Rs 400 cr.
|
Glenmark Life Standalone Financials (in Cr) |
||||
| Year Ended | Mar-21 | Mar-20 | Mar-19 | Mar-18 |
| Revenue | 1885 | 1537 | 886 | 0.25 |
| Operating Profit | 591 | 472 | 248 | -0.01 |
| OPM% | 31.4 | 30.7 | 27.9 | -5.6 |
| Other Income | 0.81 | 11.99 | 0.44 | 0 |
| EBIDTA | 592 | 484 | 248 | -0.01 |
| EBIDTA % | 31.4 | 31.2 | 28.0 | -5.6 |
| Interest | 88 | 34 | 1 | 0 |
| Depreciation | 33 | 29 | 19 | 0 |
| Net Profit | 352 | 313 | 196 | -0.44 |
| Equity (Implied) | 24.51 | 1.96 | 1.96 | 0.01 |
| Reserves (Implied) | 1788 | 400 | 86 | 0 |
| Fixed Assets | 579 | 550 | 530 | 0 |
Valuation
GLS’ cap price (Rs 720) discounts its fiscal 2021 earnings about 25 times which compares well with other leading API players. In fact, in many parameters GLS scores well as compared to its peers. Nevertheless, if one compares with the current discounting of Glenmark Pharma, GLS’ pricing is on the higher side.
Glenmark Pharma’s net earnings are discounted 11.4 times (vs GLS’ 25.1x), Price to Cash EPS is 10.5x (vs GLS’ 22.9x), Price to Book Value is 1.3x (vs GLS’ 4.9x), Price to EBIDTA is 8x (vs GLS’ 14.9x), Price to Revenue is 2.5x (vs GLS’ 4.7x) and Price to Net Block 11.9x (vs GLS 15.2x). When GPL which currently owns GLS 100% is discounted lowly, how can one justify a higher discounting for GLS?
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HOW GLENMARK LIFE COMPARES WITH INDUSTRY PEERS |
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|
Financials |
|||||||
| (Amount in Cr) | Glen Life | Divi’s Lab | Laurus | Aarti Drug | Solara | Shilpa | Neuland |
| Market Cap | 8822 | 127084 | 35598 | 6648 | 5999 | 5406 | 2729 |
| Fixed Assets | 579 | 4405 | 2222 | 679 | 940 | 1269 | 419 |
| Revenue | 1885 | 6969 | 4814 | 2155 | 1617 | 901 | 937 |
| Other Income | 1 | 63 | 24 | 5 | 29 | 30 | 16 |
| EBIDTA | 592 | 2923 | 1574 | 442 | 415 | 271 | 163 |
| Interest | 88 | 1 | 68 | 23 | 84 | 22 | 18 |
| Net Profit | 352 | 1984 | 984 | 280 | 221 | 146 | 81 |
| Equity Cap | 25 | 53 | 107 | 93 | 36 | 8 | 13 |
| Reserves | 1788 | 9242 | 2490 | 820 | 1553 | 1471 | 773 |
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Stock Features |
|||||||
| Current Price (Rs) | 720 | 4788 | 663 | 713 | 1670 | 663 | 2115 |
| Face Value (Rs) | 2 | 2 | 2 | 10 | 10 | 1 | 10 |
| Book Value | 148 | 350 | 48 | 98 | 442 | 181 | 609 |
| Promoter Stake % | 82.8 | 52.0 | 27.5 | 60.2 | 44.2 | 53.3 | 36.3 |
|
Profitability |
|||||||
| OPM % | 31.4 | 41.0 | 32.2 | 20.3 | 23.9 | 26.7 | 15.7 |
| Net Margin % | 18.6 | 28.2 | 20.3 | 13 | 13.5 | 15.7 | 8.5 |
| Cash EPS | 31.42 | 84.38 | 22.15 | 35.44 | 91.89 | 24.75 | 93.26 |
| Earnings Per Share | 28.69 | 74.75 | 18.33 | 30.09 | 61.64 | 18.13 | 62.5 |
|
Return |
|||||||
| RONW % | 46.7 | 21.3 | 37.9 | 30.7 | 13.9 | 9.9 | 10.3 |
| ROCE % | 74.2 | 28.7 | 35 | 32.2 | 14.5 | 9.8 | 13.2 |
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Discounting |
|||||||
| Price/Earnings | 25.1 | 64.1 | 36.2 | 23.7 | 27.1 | 36.6 | 33.8 |
| Price/Cash EPS | 22.9 | 56.7 | 30.0 | 20.1 | 18.2 | 26.8 | 22.7 |
| Price/Book Value | 4.9 | 13.7 | 13.7 | 7.3 | 3.8 | 3.7 | 3.5 |
| Price/EBIDTA | 14.9 | 43.5 | 22.6 | 15.1 | 14.5 | 20.0 | 16.8 |
| Price/Revenue | 4.7 | 18.2 | 7.4 | 3.1 | 3.7 | 6.0 | 2.9 |
| Price/Fixed Assets | 15.2 | 28.9 | 16.0 | 9.8 | 6.4 | 4.3 | 6.5 |
Concern
- Group’s penchant for floating too many foreign subsidiaries, constant reorganizations/amalgamations reflect poorly on the management quality which has already taken a toll on the flagship’s stock price.