Quest Labs NSE SME IPO review (May apply)

•    The company is engaged in the manufacturing of pharma formulations.
•    It marked sudden boost in its bottom lines from FY22 onwards.
•    Based on FY24 super earnings, the issue appears fully priced. 
•    Well-informed/cash surplus investors may park moderate funds for the medium term. 

ABOUT COMPANY:
Quest Laboratories Ltd. (QLL) is engaged in the business of manufacturing of pharmaceutical formulations across a broad spectrum, including antibiotics, antimalarials, antispasmodics, anti-inflammatories, antiemetics, respiratory medications, diabetes treatments, antidepressants, and more. These formulations fall under the trademark "Quest Laboratories Limited". The company produces a variety of products, comprising ethical drugs, generic drugs, and over-the-counter drugs (OTC). These products are available in various forms such as tablets, liquid orals, oral dry powders, oral powders (ORS), ointments, and external liquids. This comprehensive approach allows the Company to address a wide range of medical needs and preferences among patients.

The Company holds WHO Schedule M GMP, and GLP certifications, adhering to the stringent guidelines set by the World Health Organization. Its commitment to quality is further demonstrated by ISO 9001:2015 certification and ISO/IEC 17025:2017 accreditation. With manufacturing under one roof, the company maintains stringent quality control standards throughout the entire manufacturing process. By doing so, it ensures that products meet the relevant quality standards before they reach the market.

The Company also possesses Good Laboratory Practice (GLP) certificate issued by Food & Drug Administration, Bhopal, Madhya Pradesh, indicating its commitment to maintaining high standards of quality and compliance in laboratory operations, particularly within the pharmaceutical sector. Its in-house laboratory is equipped with various equipment such as HPLC (High-Performance Liquid Chromatography), GC (Gas Chromatography), FTIR (Fourier Transform Infrared Spectroscopy), UV (Ultraviolet-Visible Spectroscopy), Dissolution apparatus, and other advanced instruments. This comprehensive suite of tools enables the company to conduct a wide array of tests and analyses efficiently and accurately.

QLL has been receiving sales orders from the private sector & government institutions on regular basis. This collaborative approach offers benefits to the purchasers, including cost efficiency through bulk production, capacity scaling, regulatory compliance, reduced lead times, risk mitigation, access to specialized technologies, geographical expansion, cost effective compliance, and resource optimization. The company has successfully bid for government tender contracts over the past few years, collaborating with major state and central government institutions and corporations.

QLL operates in the domestic market across twelve (12) states and two (2) union territories namely Uttar Pradesh, Madhya Pradesh, Maharashtra, Delhi, Jharkhand, Assam, Karnataka, Jammu & Kashmir, Rajasthan, West Bengal Gujarat, Telangana, Haryana and Bihar. As of December 31, 2023, it had 83 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 4449600 equity shares of Rs. 10 each to mobilize Rs. 43.16 cr. at the upper cap. It has announced a price band of Rs. 93 - Rs. 97 per share. The issue opens for subscription on May 15, 2024, and will close on May 17, 2024. The minimum application to be made is for 1200 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 27.15% of the post-IPO paid-up capital of the company. (However, this data is missing from RHP). From the net proceeds of the IPO, it will utilize Rs. 26.00 cr. for capex on expansion plans for existing unit, Rs. 10.00 cr. for working capital, and the rest for general corporate purposes.

The issue is solely lead managed by Shreni Shares Ltd., and Bigshare Services Pvt. Ltd. is the registrar of the issue. Rikhav Securities Ltd. is the market maker for the company. 

The company has issued initial equity capital at par the company issued further equity capital in the price range of Rs. 30 to Rs. 100 per share between March 2010 and January 2024. It has also issued bonus shares in the ratio of 9 for 1 in September 2023. The average cost of acquisition of shares by the promoters is Rs. 1.00 and Rs. 1.16 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 11.94 cr. will stand enhanced to Rs. 16.39 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 158.96 cr.  

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 30.44 cr. / Rs. 0.66 cr. (FY21), Rs. 59.54 cr. / Rs. 4.11 cr. (FY22), Rs. 61.86 cr. / Rs. 5.03 cr. (FY23). For 9M of FY24 ended on December 31, 2023, it earned a net profit of Rs. 7.75 cr. on a total income of Rs. 62.18 cr.

For the last three fiscals, it has reported an average EPS of Rs. 3.70, and an average RoNW of 32.28%. The issue is priced at a P/BV of 4.60 based on its NAV of Rs. 21.11 as of December 31, 2023, and at a P/BV of 2.42 based on its post-IPO NAV of Rs. 40.03 per share (at the upper cap).

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 15.37 and based on FY23 earnings, the P/E stands at 31.60. Thus the issue appears fully priced. 

For the reported periods, the company has posted PAT margins of 2.16% (FY21), 6.90% (FY22), 8.16% (FY23), 12.48% (9M-FY24), and RoE margins of 11.78%, 51.69%, 40.20%, 34.03% respectively for the referred periods. 

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Beta Drugs, Alpha Labs, and Zenith Drugs, as their listed peers. They are trading at a P/E of 35.02, NA and 20.4 (as of May 10, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER'S TRACK RECORD:
This is the 27th mandate from Shreni Shares in the last three fiscals (including the ongoing one), out of the last 10 listings, all listed with premiums ranging from 7.5% to 143.24% on the date of listing.