Valiant Lab IPO review (May apply)

•    VLL is in the manufacturing of APIs and bulk drugs with a prime focus on paracetamol.
•    Though it posted growth in its top lines for the reported periods, it marked inconsistency in its bottom lines. 
•    On PAT and RoCE margins, it marked declining trends.
•    Based on FY23 earnings, the issue appears fully priced. 
•    Well-informed investors may park funds for medium to long-term rewards. 

ABOUT COMPANY:
Valiant Laboratories Ltd. (VLL) is an Active Pharmaceutical Ingredient ("API") / Bulk Drug manufacturing company with having focus on the manufacturing of Paracetamol. Bulk drugs/Active Pharmaceutical Ingredients (API) serve as raw materials for manufacturing finished dosage forms or formulations. Paracetamol (Scientific name: Acetaminophen or para-hydroxyl acetanilide - C8H9NO2), is one of the most commonly taken analgesics worldwide and is recommended as the first-line therapy in pain conditions by the World Health Organization (WHO). Paracetamol has several applications such as usage in the treatment of headaches, muscle aches, arthritis, backaches, toothaches, colds, and fever. 

The company manufactures Paracetamol in various grades such as IP/BP/EP/USP, as per the pharmacopeia requirements of customers. Paracetamol was initially approved by the U.S. Food and Drug Administration ("U.S. FDA") in 1951 and is available in a variety of forms including syrup form, regular tablets, effervescent tablets, injection, suppository, and other forms. Paracetamol is often found combined with other drugs in many over-the-counter ("OTC") allergy medications, cold medications, sleep medications, pain relievers, and other products. (Source: CRISIL Report)

The pharmaceutical API industry in India is ranked third-largest globally in terms of volume, behind China and Italy - About 35 percent of API and intermediaries produced in India are exported, and the remaining API and intermediaries are sold in the domestic market, including captive consumption by several large formulation players. India is the largest provider of generic drugs, globally contributing to ~20% of global supply by volume of generic drugs. The paracetamol API market growth was mainly supported by growth in the pain and analgesics therapy area which focuses on the treatment of common fever, cough, and cold as well as volume rise coupled with strong realization levels for players.

The paracetamol API demand saw an uptick in fiscal 2022 owing to pent-up demand, due to covid-19 and extensive usage of common cold and fever drugs during the second wave of covid-19. Also, the boost in export demand due to supply restrictions in China gave opportunities for Indian manufacturers to tap the potential export market. Going forward the paracetamol API industry is expected to clock a CAGR of 5-7% between fiscal 2023 and fiscal 2027, largely driven by the demand from domestic formulation manufacturers as well as export markets. (Source: CRISIL Report). As of July 31, 2023, it had 91 employees on its payroll. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden book-building route IPO of 10890000 equity shares of Rs. 10 each. It has announced a price band of Rs. 133 - Rs. 140 per share of Rs. 10 each and mulls mobilizing Rs. 152.46 cr. at the upper cap. The issue opens for subscription on September 27, 2023, and will close on October 03, 2023. The minimum application to be made is for 105 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 25.06 % of the post-IPO paid-up equity capital of the company. From the net proceeds of the IPO funds, it will utilize Rs. 80.00 cr. for part financing of capex in subsidiary VASPL, Rs. 45.00 cr. for working capital of VASPL, and the rest for general corporate purposes. 

The company has allocated not more than 50% for QIBs, not less than 15% for HNIs, and not less than 35% for Retail investors. 

Unistone Capital Pvt. Ltd. is the sole lead manager and Link Intime India Pvt. Ltd. is the registrar of the issue. 

Having issued initial equity shares at par value, the company issued further equity shares at a price of Rs. 89.30 per share in February 2023. It has also issued bonus shares in the ratio of 1 for 10 in March 2022 and 1 for 1 in February 2023.  The average cost of acquisition of shares by the promoters is Rs. 12.56 and Rs. 22.73 per share. 

Post-IPO, VLL's current paid-up equity capital of Rs. 32.56 cr. shares will stand enhanced to Rs. 43.45 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 608.30 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, VLL has posted a turnover/net profit of Rs. 183.78 cr. / Rs. 30.59 cr. (FY21), Rs. 293.47 cr. / Rs. 27.35 cr. (FY22 - combined data as Partnership firm + limited co.), and Rs. 338.77 cr. / Rs. 29.03 cr. (FY23). Though the company posted growth in its top line, its bottom line remained inconsistent.

For the last three fiscals, the company has reported an average EPS of Rs. 9.43 and an average RoNW of 33.01%. The issue is priced at a P/BV of 4.54 based on its NAV of Rs. 30.86 as of March 31, 2023, and at a P/BV of 2.41 based on its post-IPO NAV of Rs. 58.22 per share (at the upper cap).

If we attribute FY23 earnings to the post-IPO fully diluted paid-up equity capital of the company, then the asking price is at a P/E of 20.96. 

For the last three fiscals, the company posted PAT margins of 16.65% (FY21), 9.37% (FY22), and 8.56% (FY23), and its RoCE for the corresponding periods were 70.86%, 35.75%, and 22.76 respectively. Thus it has marked declining trends on both these aspects. 

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 Granules India, Jagsonpal Pharma, Alkyl Amines, and Laxmi Organic as their listed peers. They are trading at a P/E of 17.81, 34.47, 61.08, and 70.52 (as of September 26, 2023). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
This is the 13th mandate from Unistone Capital in the last three fiscals (including the ongoing one). Out of the last 10 listings, all were listed with premiums ranging from 3.57% to 270.40% on the day of listing.