Equity Research: Supriya Lifescience Ltd.

Summary

Supriya Lifescience Ltd. looks fundamentally strong for a good upside potential of 35% from its CMP of Rs.332

Supriya Lifescience Ltd (SLL), established in 2008 is one of the leading manufacturers and suppliers of active pharmaceuticals ingredients (“APIs”) globally. SLL caters through its niche product offerings of 38 APIs with focus on diverse therapeutic segments. It is a leader in therapeutic segments like Anti-Histamines, Anti-Allergic, Anti-Asthmatics, Anesthetic & Vitamins. It operates through a modern state of art manufacturing facility located in Parshuram Lote, Maharashtra and the facility is certified by USFDA, EDQM, EUGMP, NMPA & Health Canada. It exports its products to 86 countries to 1,296 customers including 346 distributors. 

SLL’s operations has wide and diversified presence globally. It has niche product offering across different therapeutic areas. It is poised for growth with capacity ramp up and with the support of experienced team. SLL’s long-standing relationship with the customers are a result of consistent product quality and reliability of supply. SLL is well placed with its leadership position in niche products, its focus on registering existing products in regulated markets and backward integrated facilities with geographical diversification should help uphold the momentum in the coming years. 

Key Strengths:

1. Well Recognised Niche Products:

SLL’s products are well recognised by the major pharmaceutical players across the globe. It enjoys well-established presence in the API market by catering to diverse therapeutic segments. SLL has been a R&D driven company and its continuous focus towards enhancement and expanding its R&D facility has played a key role in establishing its position. SLL’s core strength lies in early identification of molecules going off patent in its existing therapeutic segments keeping in mind its existing chemistry and production infrastructure and ability to develop the product and scale-up the production. It mainly focuses on products which are high on value and low on competition which helps it derive relatively higher returns. At present it manufactures and supplies 38 APIs that finds application in therapies like antihistamine, analgesic, anaesthetic, vitamin, antiasthmatic and anti-allergic etc. It has consistently been the largest exporter of few products namely Chlorpheniramine Maleate and Ketamine Hydrochloride from India, contributing to 45-50% and 60-65%, respectively, of the API exports from India, between Fiscal 2017 and 2022. It was also amongst the largest exporter of Salbutamol Sulphate in terms of volume from India in Fiscal 2021. 

2. Expanding Market Presence:

SLL’s manufacturing capabilities range from development of simple molecules to highly complex molecules with expertise in different class of reactions. It implemented backward integration for its API products with an attempt to exercise greater control over the supply chain process (intermediates). It’s R&D efforts are primarily focused across the value chain of API process development which is backed by a team of 23 scientists. 12 out of its total existing products are backward integrated, which contributed 68% of its total revenue for FY21 and for FY22. This is a bold move with the expectation that the process will result in cost savings, increased revenues, and improved efficiency in the production process. The company intends to continue to grow their sales in existing geographies in Latin America, North America, Europe, Asia and Middle East, and to grow their market share in these markets by increasing their product portfolio in these markets and by leveraging their existing relationships with customers.

3. Diversifying Product Portfolio:

The company is further diversifying its product portfolio with strong product pipeline. Focus mainly remains to eliminate the risk associated with dependence on few API’s. Some of the new products have already been launched this year and has started complementing with the existing therapies like Decongestant molecules goes in combination with anti-seminal, anti-allergy. SLL is in the process of commencing commercial production. SLL has filed 14 active DMFs with the USFDA and 8 active CEP’s with EDQM for their API products in therapeutic areas such as antihistamine, analgesic, anaesthetic, vitamin, antiasthmatic and anti-allergic. They will continue to focus on developing and filing of more DMFs in the area of niche and differentiated products which provide better growth opportunities and would help them in developing their business. 

Global pharmaceutical market is expected to grow at a steady ~5% CAGR from 2020 to 2025. It has grown by around 4.8% CAGR from ~USD 955 billion in CY14 to ~USD 1,270 billion in CY20. It is expected to sustain this growth over the next five years to reach USD 1,585-1,625 billion in CY25. 

Emerging markets represent an exceptional opportunity for the pharmaceutical industry on account on expected rise in healthcare spending from current low levels and increase in per capita income to support this rise in expenditure. Emerging markets comprise of Brazil, India, China, South Africa, Asean-5. Emerging Asia comprises the ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, Vietnam) economies. 

Indian bulk drug industry ranks third globally in terms of volume, after China and Italy. Export of Indian bulk drugs produced accounts for 35% and the remaining bulk drugs are sold in the domestic market, including captive consumption by several large formulation players. India being the largest provider of generic drugs globally contributes around 20% in global supply in terms of volume. India ranks lower in terms of value of pharmaceutical at 14th position as compared to 3rd position in ingredients (APIs), especially in regulated markets, compared with China. This is on account of its advanced process chemistry skills. Over the years manufacturing costs of Indian bulk drug players have tend to be lower than in the regulated markets of the United States (US) and Europe. China enjoys competitive advantage as a major exporter of bulk drug intermediates globally mainly due to government support, coupled with low power and labour costs. On the other hand, India is a preferred destination for the procurement of active pharmaceutical ingredient especially in regulated markets, compared with China. This is on account of its advanced process chemistry skills, which aid the manufacture of bulk drugs and complex intermediaries. 

The manufacturing players in China got largely affected from 2017 due to its environmental crackdown. The Blue sky policy forced many industrial parks and chemical companies to shut their units either temporarily or permanently. This incident impacted the global pharma industry. This not only led to shortage of raw material and API supply but also pushed the prices northwards for the global pharma industry. Thus, India now stands to benefit from China plus one strategy of global pharmaceutical players. Many global players have renewed their interests for raw material procurement. This will help to enhance supply chain resilience by diversifying sourcing/manufacturing activities into other countries. Increasing enquiries and acceptance for India’s products from global innovators makes the domestic API manufacturers chances higher to be the second source and gradual shift from China to India. China is facing lot of issues in terms of supplying bulk drugs/API to its customers since the coronavirus pandemic breakout. This has led to constant rise in the prices of these drugs. Even though, supply from China has resumed, it is having quality issues in recent times which has helped India to gain a competitive edge in the sector. India has highest number of US FDA-approved facilities outside the US. India has consistently maintained its leadership in drug master file (DMF) submissions. This proves the capability of Indian players to meet required export quality standards for regulated markets. 

Result Highlights:

• For Q4FY22, Total revenue grew by 37.17% YoY and 49.01% QoQ to INR 1,812 Mn. FY22 revenue stood at INR 5,201 Mn showing growth of 35.60% YoY. 
• EBITDA grew by 11.90% YoY to INR 752 Mn for the quarter and EBITDA margin decreased by 937 bps YoY and improved 618 bps QoQ) to 41.50%. Higher input costs dented the margins. 
• For Q4FY22, PAT showed a de-growth of 4.74% YoY but was up 16.7% QoQ to INR 462 Mn, PAT margin contracted by 1122 bps YoY and by 707 bps QoQ to 25.50%.
  Lower PAT % in Q4FY22 is on account of lower provision of deferred taxes in earlier quarter. 
• Recommended the Final Dividend of INR 0.60 per equity share.

Historical Financial:

Estimated Financials:

                                                                                               Source: Ace Analyser

Valuation:

SLL is expected to clock a healthy 20.2% Revenue CAGR over FY21-FY23E, and expect revenue to touch INR 6,240 Mn in FY23E from INR 3,962 Mn in FY21. During FY21 lower input costs and better realisation for its products pushed the margins upwards. We believe its continuous focus towards diversifying the product portfolio, higher market share in key contributing products and penetration into newer geographies will aid growth in topline. SLL is expected to report 16.39% EBITDA CAGR over FY21-FY23E and EBIDTA margins to be around 35-37% till FY23E. EBITDA in absolute terms is expected to reach INR 2,388 Mn in FY23E from INR 1,782 Mn in FY21. Its shift towards regulated markets from semi and non-regulated markets and focus towards higher value products will help it sustain higher double digit margin levels.