Glenmark Life Sciences IPO: Getting a share of the global API market

Glenmark Life Sciences joined the list of big ticket IPOs making a public offer. The company was incorporated in 2011 as a wholly-owned subsidiary of Glenmark Pharma. Indian Pharma industry is divided into Active Pharma Ingredients (APIs), CRAMs and Generics. Glenmark Life is a key player in the API space and in India it competes with other names like Divi’s Labs, Laurus Labs, Aarti Drugs, Granules etc. Global PE players like Advent, Carlyle and KKR have shown keen interest in API companies. It is in this background that the Glenmark Life Sciences IPO has been announced.

Key terms of the IPO of Glenmark Life Sciences

The total issue size of Rs.1,514 crore will consist of a fresh issue of Rs.1,060 crore and an offer-for-sale by Glenmark Pharma to the tune of Rs.454 crore. Here is a quick IPO summary.

Data Source: IPO Filings

Read: 5 Reasons to invest in Glenmark Life Sciences IPO

Glenmark Life Sciences IPO Dates -

Data Source: IPO Filings

Understanding the business model of Glenmark Life Sciences 

It is estimated that in the overall valuation of Glenmark Pharma, 35-40% value comes from Glenmark Life Sciences; a substantial chunk. Here is a key to the business model of Glenmark Life Sciences.
•    Glenmark Life develops APIs for specialized uses like in cardio vascular diseases, central nervous system diseases, pain management, diabetes and gastrointestinal disorders. APIs are the equivalent of specialized inputs that go into the manufacture of medicines and India and China have enjoyed an established leadership in this segment.

•    The API trend shifted towards India in the last couple of years after China tightened environmental norms for its bulk drug and chemical companies. Global pharma companies also preferred to diversify their dependence on China, and India offered an option. This opened up a huge opportunity for Indian API manufacturers.

•    If Active Pharma Ingredients (APIs) are one big segment of Glenmark Life, the other key segment is Contract Development and Manufacturing Operations (CDMO). This is another fast growing business which offers specialized high-end services to global pharma companies on a contract basis.

•    Glenmark Life is a leading API manufacturer for CVD, CNS and pain management via its 4 manufacturing facilities with a combined capacity of 726 KL. Glenmark Life exports to the Americas, Europe and Japan with long standing relations with top generic players.

Read: 6 Facts to Know Before Investing in Glenmark Life Sciences IPO

Glenmark Life Sciences' Financials – Smart growth, solid margins

Glenmark Life has presented a strong growth story and offers a macro play on the API growth in India. Sales more than doubled from Rs.887 crore in FY19 to Rs.1,886 crore in FY21. The asset turnover ratio (a key driver of profitability) has improved from 0.60 in FY19 to 0.94 in FY21.

Glenmark Life Sciences saw net profits growing 80% in last 2 years from Rs.196 crore in FY19 to Rs.352 crore in FY21. Over the last 3 years, the net profit margins have been 22.1%, 20.2% and 18.87%. During the same 3 years, the return on assets (ROA) were 13.3%, 18.1% and 17.6%. In short, return ratios have been robust and stable in last 3 years.

Look at Glenmark Life Sciences as a macro play on API opportunity

a)    When you invest in an idea look at what the leaders are doing. In the last 1 year, PE funds like KKR, Chrysalis, Advent and Carlyle have infused $1.5 billion into Indian API players. This year, they are cutting a cheque of $4 billion. Clearly the story is huge.

b)    The IPO upper price band values the stock at over 25X P/E ratio on FY21 EPS. However, the annualized growth in profits and revenues has been much more than that. This is lower than peer group valuations and should look better with forward earnings.

c)    APIs is really the story of what the Indian pharma industry is really likely to specialize, differentiate and deliver in the next 5 years. That is where Glenmark Life Sciences is positioned making it a highly attractive proposition.

Execution is the key in the API business, but the valuations and the virtually unlimited API opportunity for Indian companies, does make Glenmark Life IPO a compelling proposition.