Earum Pharmaceuticals BSE SME IPO review (Avoid)

• EPL is engaged in pharma products trading activities only and has now own manufacturing unit.
• The issue is fully priced based on its recent financial performance.
• Currently, the pharma sector is being ignored by investors.
• Pharma trading is a high volume – low margin business with high competition.

 
ABOUT COMPANY:
Earum Pharmaceuticals Ltd. (EPL) is engaged in the pharmaceutical business involving marketing, trading and distribution of wide range of pharmaceutical formulation products such as antibiotic drugs, anti-malarial drugs, anti-allergic & anti cold drugs, analgesic/ antipyretic & anti-inflammatory drugs, dermatology products, cerebral activator drugs, neurological drugs, gastrointestinal drugs, steroids, gynecology drugs, calcium, multivitamins, anti-oxidants and injections. As on the date of Prospectus, it offers around 125 pharmaceutical formulation products, of which around 24 products are marketed by it under own brand name, the manufacturing of which is outsourced by it to third parties. Apart from pharmaceutical formulation products, EPL also deals in trading of active pharmaceutical ingredients (API's) such as Levofloxacin Hemihydrate IP Albendazole IP, Amoxicillin Trihydrate IP etc. It has no own manufacturing unit and is purely engaged in trading activities. EPL is in high volume-low margin business with high competition.
 
ISSUE DETAILS/CAPITAL HISTORY:
To part finance its working capital (Rs. 5.00 cr.), general corpus fund (Rs. 0.86 cr. ) needs, EPL is coming out with a maiden IPO of 1848000 equity shares of Rs. 10 each at a fixed priced of Rs. 36 per share to mobilize Rs. 6.65 cr. The issue opens for subscription on 21.06.19 and will close on 26.06.19. Minimum application is to be made for 3000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. Issue constitutes 29.96% of the post issue paid up capital of the company. EPL is spending Rs. 0.79 cr. for this issue process.
 
The issue is solely lead managed by Hem Securities Ltd. while Bigshare Services Pvt. Ltd. is the registrar to the issue. Hem Securities Ltd itself is the market maker for this issue.
 
Having issued initial equity at par, EPL issued further equity in the price range of Rs. 75 to Rs. 125 per share between July 2015 and February 2018. It has also issued bonus shares in the ratio of 13 shares for every 1 share held in April 2019.   
 
The average cost of acquisition of shares by the promoters is Rs. 6.53 per share.
 
Post issue EPL's current paid up equity capital of Rs. 4.32 cr. will stand enhanced to Rs. 6.17 cr.
 
FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, EPL has posted turnover/net profits of Rs. 18.63 cr. / Rs. 0.10 cr. (FY16), Rs. 23.69 cr. / Rs. 0.16 cr. (FY17) and Rs. 35.85 cr. / Rs. 0.86 cr. (FY18). For the first nine months ended on 31.12.18, it has earned a net profit of Rs. 0.87 cr. on a turnover of Rs. 34.50 cr.
 
For the last three fiscals, EPL has posted an average EPS of Rs. 2.25 and an average RoNW of 14.85%. The issue is priced at a P/BV of 1.89 on the basis of post issue NAV of Rs. 19.02. Its NAV as on 31.12.18 was Rs. 164.50 (on the pre-bonus issue basis).
 
If we annualize latest earnings and attribute it on fully diluted equity post issue, then asking price is at a P/E of around 19 against the industry average of 23. This issue is fully priced.
 
COMPARISION WITH LISTED PEERS:
As per offer documents, it has shown Vaishali Pharma as its listed peer that is currently trading at a P/E of around 30 (as on 14.06.19). However, it is strictly not comparable.
 
MERCHANT BANKER'S TRACK RECORDS:
On merchant banker's front, this is the 36^th mandate from its stable in the last four fiscals. Out of last 10 listings, 2 opened at discount, 1 at par and the rest with a premium ranging from 0.04% to 20%  on the day of listings.