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Anish Moonka

@AnishA_Moonka

Jul 26, 2021

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Glenmark Life Sciences (GLS) IPO notes ๐Ÿ”ฌ Plans to take the capacity to 1762KL (currently 762KL) in the next 4 years. Hit the 'retweet' & help us educate more investors A thread ๐Ÿงต๐Ÿ‘‡ #IPOwithJST

1/ About the company Developer & manufacturer of high value, non- commoditized APIs (complex & low competition) in chronic therapeutic areas: CVS, CNS, pain management & diabetes, etc Basic details about the IPO ๐Ÿ‘‡ Note: After paying off liabilities, 150crs remain for capex.

2/ The Journey Established the API business in FY02 Since 2015, Have not received any adverse reactions from regulators (USFDA, PMDA) in the total 38 audits & inspections & Have gone through 432 customer audits. Filled 403 DMFs & CEP registration across markets globally.

3/ Trends that the company is betting on & what works for them China+1: India API market growth (10% cagr projected from FY21-26) will outpace the industry: Driven by specialty API+ Strong domestic market Highest no. of USFDA approved API facilities & % of DMFs filled

4/ Interesting facts - 120 molecules: $142B market size - Targetting 8 to 10 new molecules every yr (Key differentiator over time) - 66% of sales from regulated markets - Works with 16 of the top 20 generic cos. - Top 7 customers: 5 to 15yrs old

5/ API Portfolio Key products in generic API business ๐Ÿ‘‡ (Shows cost leadership in few molecules as market share is 30%+) Strategy to mix: High value & High Volume APIs Complex API is a future growth market: Going into the development of Peptide APIs by FY22.

6/ R&D: the secret ingredient Spends 2-2.5% of rev every year 39 patents under the belt 213 R&D personnel in 3 dedicated facilities Focus on cost improvements in existing products & developing newer products: onco, peptides, iron compounds

7/ Manufacturing Capacity & Capex 4 plants 762KL capacity, running at 85% capacity: 3 USFDA approved, 1 for emerging markets Increasing capacity by 200KL in Dahej & Ankleshwar by FY23 Investing in a new greenfield capacity: will take it to aggregate 800KL capacity in 3-4yr

8/ Experienced Management with a proven track record: A total of 1537 permanent employees.

9/ CDMO business: 8-10% of their rev (will ramp up) End of lifecycle management- when the innovator loses its patent & looks for a cheaper source of their API; they can choose GLS The ๐ŸŒŽ trends that benefit this business ๐Ÿ‘‡

10/ Financials Rev scaled at 16% cagr from FY19-21 Margins consistently above 30% (high operational efficiency as GMs are 50-55%) Stable cash flows: WC requirements are high, OCF & debt would be enough to increase capacity over the next 4-5yrs

11/ Risks: - High Customer churn: Only 41% of the customers stayed from FY19 to FY21. - Imports 40% of RM from China: could face huge pricing pressure which they are not able to pass on. - Regulatory & compliance risks - Client concentration: 56% of rev from the top 5 customers

12/ - Dependence on key products: Top 10 account for 66% of sales - Capex implementation risk - Multiple outstanding litigations against the promoter & the company - COVID risk: some disruptions in acute products & favipiravir sales benefit: net 2-3% +ve effect in FY21.

13/ - Increased competition in their respective products: pricing pressure - Working capital risk: have huge credit terms up to 180 days - High employee attrition of 18-20% - Failure to get the environmental clearances for new facilities.

14/ We believe Glenmark Life sciences IPO which is currently valued at 4.6x EV/sales, 15x EV/EBITDA & 25x Price/Earnings & following the lucrative strategy to become bigger in complex APIs, is rather reasonably valued. End of thread.

Comparison with the peers - Top quartile EBITDA margins - Low capex requirements & high asset turnover business - Cash conversion cycle is one of the worst: Needs to invest a lot of working capital to grow if it doesn't improve - Valuation wise, A discount to industry averages

A glossary for the complex industry-related abbreviations I used above ๐Ÿ‘‡

To understand more about the business dynamics of the API sector in depth Watch this video by Sajal Sir @Conviction | Patience, hosted by @Intrinsic Compounding (Better get the whole webinar from them) youtu.be/M4sNTLJHZYk

Anish Moonka

@AnishA_Moonka

CEOโ€™s Office (Research) at @Team_Hike | IIT KGP alum | Tweets on Books, Web(2+3), Stocks, Crypto & Gaming | Good Luck on being a thing in the world ๐Ÿ€

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