What you must know about Quest Laboratories IPO?

About Quest Laboratories Ltd

Quest Laboratories Ltd was incorporated in the year 1998 to engage in the business of manufacturing and marketing pharmaceutical products. Quest Laboratories Ltd manufactures a range of antibiotics, antimalarials, antispasmodics, anti-inflammatories, antiemetics, respiratory medications, diabetes treatments, antidepressants, and more. Quest Laboratories Ltd is predominantly a player in the Indian market with its spread across 12 Indian states and 2 UTs. Some of the major states it is present in include Uttar Pradesh, Madhya Pradesh, Maharashtra, Delhi, Jharkhand, Assam, Karnataka, Rajasthan, West Bengal, Telangana, and others. Quest Laboratories Ltd has a manufacturing facility located at Dhar in the state of Madhya Pradesh. Its employee roster across production, quality control, technical, engineering support and administrative services add up to 83 persons. Among its various product lines, Quest Laboratories Ltd also manufactures tablets, capsules, ampoules, injection vials, oral powders (ORS), liquid orals, dry syrups, and ointments.

Highlights of the Quest Laboratories IPO

Here are some of the highlights of the Quest Laboratories IPO on the SME segment of the National Stock Exchange (NSE).

• The issue opens for subscription on 15th May 2024 and closes for subscription on 17th May 2024; both days inclusive.
   
• The stock of the company has a face value of ₹10 per share and it is a book built issue. The price for the book building issue is set in the price band of ₹93 to ₹97 per share. Being a book built issue, the final price will be discovered within this band.
   
• Quest Laboratories IPO has only a fresh issue component and no offer for sale (OFS) portion. It must be remembered that the fresh issue portion is EPS dilutive and equity dilutive, but OFS is just a transfer of ownership and  hence it is not EPS or equity dilutive.
   
• As part of the fresh issue portion of the IPO, Quest Laboratories Ltd will issue a total of 44,49,600 shares (44.50 lakh shares approximately), which at the upper band IPO price of ₹97 per share aggregates to fresh fund raising of ₹43.16 crore.
   
• Since there is no offer for sale (OFS) portion, the fresh issue size will also double up as the overall IPO size. Therefore, the overall IPO size will also comprise of the issue of 44,49,600 shares (44.50 lakh shares) which at the upper band IPO price of ₹97 per share will aggregate to overall IPO size of ₹43.16 crore.
   
• Like every SME IPO, this issue also has a market making portion with a market maker inventory allocation of 2,28,000 shares. Rikhav Securities Ltd will be the market makers to the issue. The market maker provides two-way quotes to ensure liquidity on the counter and low basis costs, post listing.
   
• The company has been promoted by Anil Kumar Sabharwal and Tejaswini Sabharwal. The promoter holding in the company currently stands at 90.36%. However, post the fresh issue of shares in IPO, promoter equity holding share will get diluted to 65.82%.
   
• The fresh issue funds will be used by the company for funding the capital expenditure towards purchase of land and machinery for expansion of existing manufacturing facility, funding working capital and also for general corporate requirements.
   
• Shreni Shares Ltd will be the lead manager to the issue, and Bigshare Services Private Ltd will be the registrar to the issue. The market maker for the issue is Rikhav Securities Ltd.

Quest Laboratories IPO – Key Dates

The SME IPO of Quest Laboratories IPO opens on Wednesday, 15th May 2024 and closes on Friday, 17th May 2024. The Quest Laboratories Ltd IPO bid date is from 15th May 2024 at 10.00 AM to 17th May 2024 at 5.00 PM. The Cut-off time for UPI Mandate confirmation is 5 PM on the issue closing day; which is 17th May 2024.

It must be noted that in ASBA applications, there is no refund concept. The total application amount is blocked under the ASBA (applications supported by blocked amounts) system. Once the allotment is finalized, only the amount is debited to the extent of the allotment made and the lien on the balance amount is automatically released in the bank account. The credit of shares to the demat account on May 17th 2024, will be visible to investors under the ISIN Code – (INE0TNW01017). This allocation to the demat account is only applicable to the extent of the allocation of shares and if no allocations are made in the IPO, then no credit would be visible in the demat account.

IPO allocation and minimum investment lot size

Quest Laboratories Ltd has already announced the market maker allocation at 2,28,000 shares as inventory for market making. Rikhav Securities Ltd will be the market maker for the IPO. The net offer (net of market maker allocation) will be divided between the QIB investors, retail investors and the HNI / NII investors. The breakdown of the overall IPO of Quest Laboratories Ltd in terms of allocation to various categories are captured below.

Data Source: Company RHP

The minimum lot size for the IPO investment will be 1,200 shares. Thus, retail investors can invest a minimum of ₹1,16,400 (1,200 x ₹97 per share) in the IPO. That is also the maximum that the retail investors can invest in the IPO. HNI / NII investors can invest a minimum of 2 lots comprising of 2,400 shares and having a minimum lot value of ₹2,32,800. There is no upper limit on what the QIBs as well as what the HNI / NII investors can apply for. The table below captures the break-up of lot sizes for different categories.

Financial highlights: Quest Laboratories Ltd

The table below captures the key financials of Quest Laboratories Ltd for the last 3 completed financial years.

Data Source: Company RHP filed with SEBI

Here are some of the key takeaways from the financials of the company for the last 3 years.

• The revenues have grown at a robust pace in the last 2 years and in the latest year FY23, the total sales more than doubled over FY21. More importantly, this has been accompanied by sharp growth in the net profit levels as well as net profit margins (PAT margins).
   
• While net margins of the company have become relatively attractive at 8.16%, the return on equity (ROE) has grown sharply to 33.47% in the latest year FY23, while the ROA is robust at 10.83% in FY23.
   
• The asset turnover ratio or the sweating ratio has been stable at 1.33X and that is understandable considering the capital intensity of the business. However, this sweating ratio also gets largely rectified by the robust levels of return on assets (ROA).

The company has latest year EPS of ₹4.66 and we have not included the weighted  average EPS, since the previous year data is not exactly comparable. The latest year earnings are being discounted by the IPO price of ₹97 per share at 20-21 times P/E ratio. One has to look at the P/E ratio from two perspectives. Since the company is yet to announce the FY24 results, we can use available data to extrapolate. The 9-month EPS for FY24 stands at ₹7.18 per share and when extrapolated to full-year EPS of ₹9.57, it translates into a more reasonable P/E ratio of 10-11 times earnings.

In addition, Quest Laboratories Ltd also brings some intangible advantages to the table like multi-product capabilities, healthy R&D, supply chain efficiency etc. All these factors make the story compelling, especially when we also consider the extrapolated earnings and P/E ratio of the company. Investors must still take a perspective of over a year to be profitable on this stock, and also be willing to accept a higher level of cyclical business risk.