Sotac Pharma NSE SME IPO review (Avoid)

•    SPL is in the pharma/healthcare business with three of its subsidiaries.
•    It has posted growth in top lines, but bottom lines have seen inconsistency.
•    The loss for FY21 is a bit surprising and declining margins raise concern.
•    Based on FY23 annualized earnings, the issue appears exorbitantly priced. 
•    There is no harm in skipping this pricey issue. 

ABOUT COMPANY:
Sotac Pharmaceuticals Ltd. (SPL) belongs to the Sotac group which has a few subsidiaries having an interest in the pharma/healthcare segment. The company is in the business of manufacturing pharmaceutical products for different marketers on a loan license or contract manufacturing basis. Its business is majorly on principle to principle basis with different marketers. As of the date of this Red Herring Prospectus, SPL caters to 162 corporate clients on a loan licence and/or contract manufacturing basis. 

SPL has a 71% holding in SOTAC Healthcare Private Limited (SOTAC Healthcare), and 100% of SOTAC Research Private Limited (SOTAC Research), thus making them it's Subsidiary Companies. SOTAC Healthcare is engaged in the business of manufacturing Beta-lactam drugs. SOTAC Research is engaged in the business of pharma molecule research and development. SPL has recently started a new venture namely SOTAC Lifescience Private Limited (SOTAC Lifescience).  It holds 51% of the total paid-up capital of SOTAC Lifescience. SOTAC Lifescience is a newly incorporated company and will be engaged in the business of Manufacturing Nutraceuticals products and food products on a contract-manufacturing basis. SOTAC Lifescience is in process of setting up its manufacturing plant and yet not commenced commercial production.

Sotac group's past and present clientele includes renowned pharma marketers and manufacturers namely Cadila Pharma, J. B. Chemical, Lincoln Pharma, Intas Pharma, Viatris (Mylan), Makers (Ipca), Corona Remedies, Eris Lifesciences, Stride Pharma, Stallion Pharma, Acme Pharma, Olecare Pharma, Treatwell Pharma, Ronak Healthcare, Curever Pharma, Kentoss Pharma, Sunrest Pharma, Ishan Healthcare etc. As of the date of this Red Herring Prospectus, SPL has a total of 89 Employees, 145 contract workers, and 12 Housekeeping persons.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 3000000 equity shares of Rs. 10 each via the book-building route. It has announced a price band of Rs. 105 - Rs.111 per share and mulls mobilizing Rs. 33.30 cr. at the upper cap of the price band. The issue opens for subscription on March 29, 2023, and will close on April 03, 2023. 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. After 150000 shares of market maker quota, from the net portion of the issue, SPL has allocated not more than 50% for QIB, not less than 15% for HNIs, and not less than 35% for Retail investors. 

From the net proceeds of the IPO fund, it will utilize Rs. 10.80 cr. for working capital, Rs. 7.00 cr. for investment in the subsidiary, Rs. 5.90 cr. for the upgradation/expansion of existing premises, and the balance for general corporate purposes. 

Beeline Capital Advisors Pvt. Ltd. is the sole Book Running Lead Manager and KFin Technologies Ltd. is the registrar of the issue. Sunflower Broking Pvt. Ltd. is the market maker for the company. 

Having issued the entire equity capital at par so far, the company has also issued bonus shares in the ratio of 5 for 2 in December 2022. The average cost of acquisition of shares by the promoters is Rs. 0.03. Rs. 3.09 and Rs. 3.18 per share. 

Post-IPO, SPL's current paid-up equity capital of Rs. 8.05 cr. will stand enhanced to Rs. 11.05 cr. Based on the upper cap of the price band of the IPO, the company is looking for a market cap of Rs. 122.66 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, SPL has (on a consolidated basis) posted a turnover/net profit - (loss) of Rs. 28.83 cr./ Rs. 0.09 cr. (FY20), Rs. 48.95 cr. / Rs. - (2.37) cr. (FY21), and Rs. 73.37 cr. / Rs. 2.88 cr. (FY22). For H1 of FY23 ended on September 30, 2022, it earned a net profit of Rs. 0.47 cr. on a turnover of Rs. 39.95 cr. Though its top line shows growth, its bottom line has marked inconsistency with a surprising loss for FY21. As of September 30, 2022, it has total borrowings of Rs. 21.86 cr., which raises concern (refer to page no. F34 of the offer document).

For the last three fiscals, SPL has (on a consolidated basis) reported an average EPS of Rs. 2.32 and an average RoNW of 43.47%. The issue is priced at a P/BV of 11.20 based on its NAV of Rs. 9.91 as of September 30, 2022. (Refer to page no. 20 of the offer document).

The offer document is silent on its NAV details as of September 30, 2022. (refer the page no. 102 of the offer document). Its PAT margins, RoE, and RoCE has marked rollercoaster rides for the reported period and raised concern (refer to page 104 of the offer document).

If we annualize FY23 earnings and attribute it to post-IPO fully diluted paid-up equity capital, then the asking price is at a P/E of around 132.14. Based on FY22 earnings the issue is at a P/E of 42.53. Thus the issue appears exorbitantly priced. 

DIVIDEND POLICY:
The company has declared 20% dividends for FY22. It will adopt a prudent dividend policy post-listing, based on its financial performance and future prospects. (However, the offer document has garble data for this on page no. 188 of the offer document). 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Lincoln Pharmaceuticals as their listed peer. It is trading at a P/E of around 9.68 (as of March 24, 2023). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 11 mandate from Beeline Capital. Out of the last 10 listings, one IPO closed below the issue price on the listing date.