Promoters’ vacillating corporate policies and penchant for related party transactions make it below investible grade.
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WINDLAS BIOTECH OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Fresh Issue | Rs 165 Cr |
| Offer for Sale | 51,42,067 shares (Rs 236 Cr) |
| Face Value | Rs 5 |
| Price Band | Rs 448 – 460 |
| Mkt/Bid Lot | 30 Nos. |
| Implied M-Cap | Rs 1,003 cr |
| Implied Equity Cap | Rs 10.90 cr |
| Free Float | 40.05% |
| Lead Manager | SBI Capital, DAM Capital, IIFL Securities |
| Registrar | Link Intime |
| Listing At | BSE, NSE |
| INDICATIVE ISSUE SCHEDULE | |
| Opening : 4-Aug-2021 | Closing : 6-Aug-2021 |
| Allotment : 11-Aug-2021 | Refunding : 12-Aug-2021 |
| Demat Credit : 13-Aug-2021 | Trading : 17-Aug-2021 |
The Offer
Dehradun-based Windlas Biotech Ltd is going public with an IPO of Rs 401 cr. The offer consists of a fresh issue of Rs 165 cr from the company and an offer for sale (OFS) of 51,42,067 shares valued at Rs 236 cr. Of the OFS 11, 36,000 share are offered by one of the promoter group member and 40,06,067 shares are offloaded by Tano India Private Equity Fund. The offer is being made through the book-building route with a price band of Rs 448-460 for Rs 5 paid-up share. At the cap price, the quantum of IPO works out to about 87.29 lakh shares.
Applicants should bid for a minimum lot of 30 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE & NSE on August 17, 2021. SBI Capital, DAM Capital and IIFL Securities are acting as managers to the offer and Link Intime has been roped in as registrar to the issue. The bidding opens on Wednesday, August 4 and closes on Friday, August 6, 2021.
The company proposes to utilize the net proceeds to the tune of Rs 50 cr towards capacity expansion at Dehradun, Rs 48 cr for funding incremental working capital requirements, and Rs 20 cr towards repayment of loans. The balance fresh issue amount net of issue expenses is earmarked for general corporate purposes. However, such fund requirements and deployment of funds have not been appraised by any bank or financial institution or any independent agency.
Lineage
Many a new promoter comes to public when capital markets witness a boom. Post-boom, most of them disappear like the grey market operators. In this backdrop, it’s imperative to look at the credibility and capability of every new promoter who enters the market during the boom time.
Though the Dehradun-based Windlas Biotech Ltd (WBL) has been in existence for two decades, its promoters Ashok Kumar Windlass, Hitesh Windlass, Manoj Kumar Windlass and AKW WBL Family Private Trust are new to the investing public.
WBL commenced operations in 2001 and reached a turnover of Rs 100 cr in 10 years. The company added the next Rs 100 cr in four years and took only three years to add another Rs 100 cr. Nevertheless, after 2017 the top line growth has slowed down.
In terms of the “materiality policy”, WBL’s Board has identified HIM MEC TEC P Ltd and Wintech Eco Solutions P Ltd as Group Companies, though the promoters have a couple of more companies. The so called group companies’ track record is pathetic. Both the companies are in deep red.
The promoters’ corporate governance is far from convincing. WBL was originally incorporated as a public limited company in February 2001. Fifteen years later, in March 2016, its status was changed to a private limited company. After a gap of five years, in April 2021, it has once again been converted into a public limited company!
Also, until October 28, 2018, Windlas Healthcare P Ltd (WHPL) was a wholly owned subsidiary of WBL. On October 29, 2018, WBL sold 51% of WHPL to Cadila Healthcare Ltd. On April 16, 2020, WBL bought back 2% from Cadila. Two weeks later, on April 30, 2020, WBL acquired the remaining 49%. Very next day, on May 1, 2020, WHPL was merged with WBL!
What’s intriguing is what Cadila acquired in 2018 for a consideration of Rs 155.55 cr has been sold in 2020 for a lesser consideration of Rs 103.50 cr! Why should Cadila desperately sell its stake at a capital loss of Rs 52 cr, if WHPL’s operations were so profitable?
A close scrutiny of WBL’s financials reveals that, post-amalgamation of WHPL, despite revenue increasing by Rs 100 cr, profit dipped in fiscal 2021. It seems that, since WBL’s operations had become static for three consecutive years, the company resorted to the inorganic merger route to boost its top line on the eve of the public issue.
The public company WBL seems to indulge in related party transactions benefiting the promoters a significant amount. WBL has entered into lease agreement with promoters Ashok Kumar Windlass, Hitesh Windlass and Manoj Kumar Windlass in respect of its corporate office, and with Ashok Kumar Windlass in respect of a part of industrial land and property situated at Dehradun, in lieu of which the public company pays lease rentals to the tune of Rs 59 lakh per annum.
Though WBL intends to deploy a portion of the Net Proceeds for funding its capital expenditure programme, it is yet to place orders for such capital expenditure requirements. What’s more, the company proposes to purchase certain equipment from the loss-making group company, Wintech Eco Solutions!
And, as a testimony to their corporate governance practice, the IPO prospectus reveals that they were not able to obtain certain records of the educational qualifications of the founder-promoter and whole-time director, Ashok Kumar Windlass. Also, certain corporate records were not traceable or had discrepancies!
Key Management
WBL’s board is dominated by the Windlas family. All the three individual promoters are holding executive positions. Vivek Dhariwal (54), whose occupation is “Service”, is the Chairman and Non-Executive Independent Director of WBL. He reportedly has over 20 years of experience and was previously associated with ICI India, Baxter India and Pfizer.
Founder Ashok Kumar Windlass (70), who holds a diploma in civil engineering, is designated as a Whole-time Director. He was, in fact, appointed as Managing Director of WBL on April 1, 2001 but his designation has been changed to Whole-time Director on May 3, 2021.
Hitesh Windlass (44), who has replaced his father as Managing Director, holds a bachelor’s degree in ceramic engineering from IIT, Banaras Hindu University, a master’s degree in science in materials science and engineering from The Georgia Institute of Technology and a master’s degree in business administration from the Graduate School of Business, University of Chicago. He was previously associated as a process engineer with Intel Corporation, USA and joined WBL board in January 2008.
Younger sibling Manoj Kumar Windlass (42), who holds a bachelor’s degree in business administration from Georgia State University, Atlanta is the Joint Managing Director of WBL. He joined the board in April 2006 and was appointed as Joint Managing Director in April 2020.
Pawan Kumar Sharma (61), who holds a bachelor’s degree in Law, joined WBL in April 2001 as a “Manager Taxations and Administrative”. He has been elevated to the position of executive director in June 2019.
Prachi Jain Windlass (44), spouse of Hitesh Windlas, is designated as a Non-Executive Director. She holds a bachelor’s degree in technology from IIT, Delhi, master’s degree in science (electrical engineering) from the University of Southern California, and a master’s degree in business administration from University of Chicago. She was previously associated with Boston Consulting Group, Gurgaon and is currently associated with Michael & Susan Dell Foundation India LLP.
Srinivasan Venkataraman (47), a Chartered Accountant previously associated with Wealth Tree Advisors, Aon Global Insurance Services and Lovelock & Lewes, is on WBL’s board as a Non-Executive Independent Director.
Gaurav Gulati (43), who holds a bachelor’s degree in Computer Science from the University of Illinois and a master’s degree in business administration from the University of Chicago, is another Non-Executive Independent Director. He was earlier associated with Oyo Hotels and Homes.
Stakeholders
Of the company’s present equity of Rs 9.1 cr, the promoter group collectively holds 78% and a little known private equity fund Tano India is having 22%. For reasons best known only to them, Tano India, who entered the company in 2015, is offloading its entire stake of 22% through the offer for sale. Post public offer, promoter group will have about 60% at a negative cost and public will hold 40% of the enlarged equity of Rs 10.9 cr at a cost of Rs 460 (cap price).
Business Track
The domestic formulations industry is highly fragmented in terms of both, number of manufacturers and products, with 300 to 400 organized players and approximately 15,000 unorganized players. Contract manufacturing is also characterized by high fragmentation and competition, with large number of organized and unorganized players.
WBL presents itself as one the top five players in the domestic pharmaceutical formulations contract development and manufacturing organization (CDMO) segment in India in terms of revenue. The company claims to provide CDMO services ranging from product discovery, product development, licensing and commercial manufacturing of generic products. In addition to providing services and products in the CDMO market, the company reportedly sells its own branded products in the trade generics and OTC markets as well as export generic products to several countries.
(Source:Windlas RHP)
In Fiscal 2019, 2020 and 2021, CDMO Services and Products accounted for 83.73%, 87.36% and 84.66% of WBL’s total revenue from operations. Revenues from CDMO Services and Products increased from Rs 257 cr in fiscal 2019 to Rs 287 cr in fiscal 2020 and further to Rs 362 cr in fiscal 2021. The company claims to have developed relationships with leading Indian pharmaceutical companies, including Pfizer, Sanofi, Cadila Healthcare/Zydus Healthcare, Emcure Pharma, Eris Lifesciences, Intas Pharma and Systopic Laboratories.
WBL’s Domestic Trade Generics and OTC Brands vertical consists of (i) trade generic products; and (ii) OTC brands, which include nutraceutical and health supplement products that do not require prescription. Trade generic products are generic medicines, i.e. drugs for which the patents have expired, which are sold directly to the distributor and not marketed through medical representatives, and are typically used as a substitute for more expensive branded generic medicines in order to offer affordable medicines to patients by the retailers and pharmacies. WBL’s Domestic Trade Generics and OTC Brands accounted for 8.84%, 9.20% and 10.22% of its total revenue in fiscal 2019, 2020 and 2021, respectively. In value terms, it has grown from Rs 27 cr in fiscal 2019 to Rs 30 cr in fiscal 2020 and to Rs 44 cr in fiscal 2021.
WBL’s Exports Vertical is engaged in identifying high growth markets and opportunities in semi-regulated international markets as well as selected regulated markets, for developing and registering product applications to obtain marketing authorizations for generic medicines and health supplements and subsequently, sell such products to pharmaceutical companies and pharmacies in the respective markets. In fiscal 2019, 2020 and 2021, its exports accounted for 5.93%, 3.25% and 4.45% of its total revenue respectively. Revenues from export were Rs 18 cr, Rs 11 cr and Rs 19 cr in fiscal 2019, 2020 2021, respectively.
WBL has four manufacturing facilities located at Dehradun in Uttarakhand. At the end of fiscal 2021, the manufacturing facilities had an aggregate installed operating capacity of 7,063.83 million tablets/ capsules, 54.46 million pouch/ sachet and 61.08 million liquid bottles. In addition, the company claims to have recently received a license to manufacture certain APIs at its Dehradun Plant – I, which should help in backward integration.
Financial Track
The consolidated performance WBL has been uneven thanks to the management’s unpredictable corporate policy. In fiscal 2019, consolidated revenue dropped due to the majority stake sale of Windlas Healthcare. However, profit got a boost in that year as the company accounted an exceptional income, “Gain on losing control in subsidiary”, amounting to Rs49.55 cr!
In fiscal 2021 top line significantly increased in view of Windlas Healthcare’s amalgamation. But, profit dipped as operating margin fell into single digit. In April 2020 WBL created Goodwill of Rs 27.26 cr on acquisition of Windlas Healthcare which was tested for impairment in March 2021. Post impairment testing, it was found that the fair value of goodwill was less than the carrying amount. Consequently, the company had to record impairment loss of the complete amount and Goodwill was reduced to NIL at end of March 2021.
Another disappointing aspect of WBL is its poor capacity utilization. Of the Tablets/capsules and Liquid bottles capacity only about 39% was utilized. For Pouch/sachet it is still worse, at 4.41%.
| Windlas Biotech Consolidated Financials (in Cr) | ||||
| Period Ended | Mar-21 | Mar-20 | Mar-19 | Mar-18 |
| Revenue | 427.60 | 328.85 | 307.27 | 352.37 |
| Operating Profit | 32.90 | 34.00 | 87.29 | 39.46 |
| OPM% | 7.7 | 10.3 | 28.4 | 11.2 |
| Other Income | 3.09 | 2.49 | 4.26 | 4.21 |
| EBIDTA | 36.00 | 36.49 | 91.54 | 43.67 |
| EBIDTA % | 8.4 | 11.0 | 29.4 | 12.2 |
| Interest | 1.29 | 2.53 | 4.84 | 6.47 |
| Depreciation | 12.97 | 9.29 | 10.59 | 17.35 |
| Net Profit | 15.57 | 16.21 | 63.82 | 11.2 |
| Equity (Implied) | 10.90 | 6.41 | 6.41 | 5.59 |
| Reserves (Implied) | 353.22 | 203.25 | 187.17 | 116.51 |
| Fixed Assets | 92.50 | 66.10 | 64.20 | 87.30 |
Valuation
WBL has kept a price band of Rs 448-460 for Rs 5 paid up share. When grey market operators rule the roost helping every IPO to get oversubscribed many times, gamblers can bet at any price. But, for genuine long term investors, fundamentals alone can fetch decent returns.
At the cap price (Rs 460), WBL’s fiscal 2021 earnings are discounted more than 63 times which is indeed ultra high for a low margin business like pharma formulations. Tano India, whose average cost was around Rs 205 a share, is getting Rs 460 after five and half years’ wait. Will the IPO investor get such return from WBL? If the prospects were so good, surely, Tano would not be offloading their entire stake through the present offer for sale.
| Stock Features | |
| Current Price (Rs) | 460 |
| Face Value (Rs) | 5 |
| Promoter Stake % | 59.95 |
| Profitability | |
| OPM % | 7.7 |
| Net Margin % | 3.6 |
| Cash EPS | 13.21 |
| Earnings Per Share | 7.26 |
| Return | |
| RONW % | 7.8 |
| ROCE % | 10.0 |
| Discounting | |
| Price/Earnings | 63.3 |
| Price/Cash EPS | 34.8 |
| Price/EBIDTA | 27.9 |
Concern
Post -offer for sale, the average cost of holding for the promoters will become negative. Hence, after the lock-in period, the promoters can offload their stake even at a throw away price. Further, the individual promoters along with certain individuals belonging to the promoter group and Tano have entered into the “Upside Letter” in connection with Tano’s proposed exit from the company. As per this agreement, if the internal rate of return as calculated on the basis of the amount to be realized by Tano exceeds 25% on the amount invested, then Tano will share 33% of such excess proceeds with the individual promoters. This will make the promoters’ average cost more negative.
One of WBL’s independent directors, Gaurav Gulati, was previously disqualified in respect of two companies where he held directorship, namely, Freeelective Network P Ltd and Meritxell Ferre Design Studio P Ltd, by the RoC, Chennai and RoC, Delhi respectively, for a duration of five years from November 1, 2016 to October 31, 2021. Subsequently, Gaurav Gulati filed a writ petition before the High Court of Delhi, which gave a temporary relief to the director. However, Meritxell Ferre Design Studio was struck off from the Register of Companies.