Windlas Biotech - IPO Note

14th December 2022 - 12:00 pm

Windlas Biotech is a key player in the CDMO (contract development & manufacturing organization), is a specialized activity wherein a pharma company offers the niche service of additional manufacturing capacity or even specialized research services to pharma companies in India and across the globe. To avoid the costs of additional capacity, most pharma companies are now increasingly looking at such specialized CDMO companies to which they can outsource such manufacturing activities on a contract basis. It is in this space that Windlas operates in India.

CDMO is a new business where sales have been growing rapidly and it also enjoys high operating margins. Some of the major players in the CDMO space include Divi’s Laboratories, Laurus Labs, PI Industries, Jubilant Life, Neuland Labs and Suven Pharma. In terms of market cap, however, only Hikal and Neuland would be comparable with Windlas as the others have much higher levels of market cap.

Key terms of the IPO issue of Windlas Biotech

Key IPO Details	Particulars	Key IPO Dates	Particulars
Nature of issue	Book Building	Issue Opens on	14-Aug-2021
Face value of share	Rs.5 per share	Issue Closes on	16-Aug-2021
IPO Price Band	Rs.448 - Rs.460	Basis of Allotment date	11-Aug-2021
Market Lot	30 shares	Refund Initiation date	12-Aug-2021
Retail Investment limit	14 Lots (420 shares)	Credit to Demat	13-Aug-2021
Retail limit - Value	Rs.193,200	IPO Listing date	17-Aug-2021
Fresh Issue Size	Rs.165 crore	Pre issue promoter stake	78.00%
Offer for Sale Size	Rs.236.54 crore	Post issue promoters	65.16%
Total IPO Size	Rs.401.54 crore	Indicative valuation	Rs.1,240 crore
Listing on	BSE, NSE	HNI Quota	15%
QIB Quota	50%	Retail Quota	35%

_{Data Source: IPO Filings}

Here is what you need to know about the Windlas Biotech IPO

• Operating margins in this business range from 20% to 45% but this business has been hit by a spike in material costs of late in line with supply chain constraints.

• Most CDMO companies have expanded their capacity by 5-6 times in the last 5 years and CDMO companies have a high ratio of Capex to cash flows from operations.

• Being capital intensive in nature, CDMO needs a high asset turnover ratio to maintain ROCE buoyant. Windlas has maintained asset turnover consistently at above 1.

A quick look at the Financials of Windlas Biotech

The company has been consistently profit making over the last 3 years with an asset turnover ratio in excess of 1. However, the ROE has been consistently below 10%, which is much lower than the median ROE of CDMO businesses in India. Hopefully, once the debt is repaid partially through the IPO, the ROE should improve.

Financial Parameter	Fiscal 2020-21	Fiscal 2019-20	Fiscal 2018-19
Net Worth	Rs.199.12 cr	Rs.209.66 cr	Rs.193.59 cr
Revenues	Rs.427.60 cr	Rs.328.85 cr	Rs.307.27 cr
Net Profit	Rs.15.83 cr	Rs.16.21 cr	Rs.63.82 cr
Net Margins	3.70%	4.93%	20.77%

_{Data Source: RHP}

The company will be using the proceeds of the fresh issue for expansion of its Dehradun plan and also to repay debt in its books. The high profits in FY 19 contain an exceptional gain of Rs50cr from booking gains on the loss of control of the subsidiary company. Hence the profits of the last 2 years are more of sustainable nature.

Also read: 5 Things to know before applying for an Windlas Biotech IPO

Investment Perspective for Windlas Biotech

The company does bring some advantages to the table. Firstly, it is a consistently profit making company and has been in business for 20 years now. It operates in the Chronic therapeutic segment, which is a high growth space. It also has a major exposure to complex generics, apart from its traditional CDMO operations. Here are some key factors to note.

a) Windlas is already contract manufacturing for some of the leading names like Pfizer, Sanofi India, Cadila Healthcare and Emcure. It already has an installed capacity to manufacture 707 crore tablets/capsules, 5.5 core pouches and 6.1 crore liquid bottles.

b) Being a capital intensive business, the company will be using part of the fresh funds to expand its capacity in Dehradun-IV. This is a business which requires a consistently high ratio of capex to operating cash flows year after year, which compress net margins.

c) The company is in a space which is extremely competitive with companies with larger balance sheets already in the fray. However, CDMO is about established relationships that normally tend to last over time.

The risk for Windlas is the aggressive nature of competition in the CDMO business. Here it is all about relationships and about execution. With a likely post-issue market cap of Rs.1,240 crore, Windlass is much smaller than other players in the CDMO business. Valuations are steep in the range of 65-70 times. Investors will have to take a long term approach to make macro gains in the business.