Research on Ind Swift Laboratories Ltd

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Equity Research: Ind Swift Laboratories Ltd

Company Overview

Ind Swift Laboratories Ltd (ISLL) is a prominent player in the Indian pharmaceutical industry, with a strategic focus on the formulation business. The company recently completed a slump sale of its API and CRAMS business to Synthimed Labs for ₹1,650 crore on March 18, 2024, allowing it to reduce debt and concentrate on higher-margin formulation products.

Key Highlights

  • R&D Capabilities: ISLL retains significant R&D capabilities at its Thane Center, focusing on formulation development and process R&D.
  • Manufacturing Facilities: The company operates multiple manufacturing facilities across India, including locations in Punjab, Jammu & Kashmir, and Himachal Pradesh, dedicated to the production of pharmaceutical formulations.
  • Strategic Shift: The sale of the API business provides the necessary capital to reduce debt and invest in the formulation business.
  • BIOSECURE Act: The U.S. legislation encouraging diversification away from Chinese suppliers presents significant export opportunities for Indian pharmaceutical companies.
  • Management Experience: The management team has over three decades of experience in the pharmaceutical industry, providing a strong foundation for future growth.
  • Future Plans: As per the 2024 AGM, the company plans to pursue a Follow-on Public Offering (FPO) for expansion, indicating a focus on organic growth without increasing debt.

Financial Overview

  • Current Market Price: ₹137.34
  • Book Value: ₹158
  • Debt Reduction: The proceeds from the slump sale are expected to significantly reduce the company’s debt, improving its financial health.
  • Valuation: The stock is trading at a relatively low price-to-earnings (P/E) ratio of around 6 compare to Avg Industry PE of 33, indicating potential undervaluation.

Examples of Successful and Unsuccessful Pivots from API to Formulation Business

  1. Dr. Reddy’s Laboratories
  • Period of Pivot: Early 2000s
  • Reason for Success: Dr. Reddy’s Laboratories successfully transitioned from API manufacturing to formulations by focusing on generic drug development and entering regulated markets like the USA and Europe. Their success was driven by strong R&D capabilities, strategic acquisitions, and a robust pipeline of generic drugs.
  1. Sun Pharmaceutical Industries
  • Period of Pivot: Late 1990s
  • Reason for Success: Sun Pharma shifted its focus from APIs to formulations, particularly in the specialty and generic drug segments. The company achieved success through strategic acquisitions, such as the purchase of Ranbaxy Laboratories, and by expanding its presence in regulated markets.
  1. Teva Pharmaceutical Industries
  • Period of Pivot: 2000s
  • Reason for Success: Teva transitioned from API manufacturing to becoming a global leader in generic formulations. The company’s success was due to its extensive product portfolio, strategic acquisitions, and strong presence in key markets like the USA and Europe.
  1. Aurobindo Pharma
  • Period of Pivot: Early 2000s
  • Reason for Success: Aurobindo Pharma successfully pivoted from APIs to formulations by focusing on generic drug development and entering regulated markets. The company’s success was driven by its strong R&D capabilities, strategic partnerships, and a diversified product portfolio.
  1. Wockhardt
  • Period of Pivot: Late 1990s
  • Reason for Failure: Wockhardt faced challenges in its pivot from APIs to formulations due to regulatory issues, quality control problems, and financial difficulties. The company struggled to maintain compliance with international regulatory standards, leading to import bans and loss of market share.

Analogy with Ind Swift Laboratories Ltd

Ind Swift Laboratories Ltd is well-positioned to replicate the success of companies like Dr. Reddy’s, Sun Pharma, and Teva due to several factors:

  • R&D Capabilities: ISLL retains significant R&D capabilities at its Thane center, focusing on formulation development and process R&D.
  • Financial Strength: The company has a substantial cash reserve of ₹432 crore from the slump sale, providing the necessary capital for expansion.
  • Management Experience: The management team has over three decades of experience in the pharmaceutical industry, providing a strong foundation for future growth.
  • Strategic Focus: The company’s strategic shift towards formulations aligns with industry trends and offers significant growth potential.
  • Organic Growth Strategy: The plan to pursue an FPO for expansion indicates a focus on organic growth without increasing debt, reducing financial risk.

Pros of Investing in Ind Swift Laboratories Ltd

  1. Debt Reduction: The sale of the API business will significantly reduce the company’s debt, improving its financial stability.
  2. Focus on Formulations: The strategic shift towards formulations, which offer higher margins, positions the company for better profitability.
  3. R&D Capabilities: The retained R&D facilities and expertise in formulation development provide a strong foundation for new product development.
  4. Export Opportunities: The BIOSECURE Act and increasing demand for pharmaceutical products in regulated markets like the USA present significant growth opportunities.
  5. Management Experience: The experienced management team and their industry contacts can drive expansion and growth.
  6. Organic Growth Strategy: The plan to pursue an FPO for expansion indicates a focus on organic growth without increasing debt, reducing financial risk.

Cons of Investing in Ind Swift Laboratories Ltd

  1. Market Competition: The formulation market is highly competitive, with established players like Dr. Reddy’s, Sun Pharma, and Aurobindo Pharma.
  2. Execution Risk: Successfully transitioning from API to formulations requires effective execution of strategic plans and maintaining high-quality standards.
  3. Dividend Policy: Despite reporting profits, the company has not been paying dividends.
  4. Market Volatility: The stock price has shown significant volatility, which may concern risk-averse investors.

Conclusion

Ind Swift Laboratories Ltd has the potential to successfully pivot to the formulation business, given its strong R&D capabilities, regulatory approvals, and strategic focus. The company’s experienced management team and the opportunities presented by the BIOSECURE Act further enhance its growth prospects. Investing in ISLL at a price below its book value of ₹158 could be a prudent decision for those looking for undervalued stocks with growth potential.

Recommendation

Buy: Given the company’s strategic shift, debt reduction, and growth opportunities, ISLL appears to be a good investment at any price below its book value of ₹158.

Disclaimer:

I am not a registered equity research analyst under the Securities and Exchange Board of India (SEBI) regulations. The information provided in this report is based on publicly available data and personal analysis. I hold investments in the stocks mentioned in this report. This report is not intended to be a stock recommendation or investment advice. Investors are advised to conduct their own research and analysis, and consult with a qualified financial advisor before making any investment decisions.

5 Likes
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Hi,

Any comment on their proposed merger with Ind-Swift ltd. That company seems to be a debt-laden company. Promoters have clearly indicated one of the intentions of the merger is to help with the repayment of that debt through the cash generated from sale of business at Ind-swift lab due to liquidity issue at Ind-swift ltd.

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Hi @gaurav_681, the company recently completed a slump sale of its API and CRAMS business to Synthimed Labs for ₹1,650 crore on March 18, 2024 , allowing it to reduce debt completely and concentrate on higher-margin formulation products. By selling this segment, the Company paid off almost all of its loan and NCD. So now as on 31 March 2024, the Company is very light on debt and have huge cash reserve for further expansion in formulation business. The book value as on 31 March 2024 is INR 158. It indicates that it is trading at lower price of its genuine book value. Hence good margin of safety is available for all investors in this stock. Seems to be good bet for further any kind of business growth in this Company.

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Ind Swift Laboratories Ltd has significant inter-group transaction viz. investment, receivable and loan and advances to group companies. Due to stretched position at the group companies the company has long pending receivable of Rs. 275.06 Crores (PY: Rs. 262.52 crores) as on March 31, 2023. The said receivables are pending from long time and has led to stretched liquidity at ISLL. Apart from this the company has investment of Rs. 85.12 Crores (PY:110.68 cr) and loan and advances of Rs. 96.81 Crores (PY: 52.77 cr) as on March 31, 2022. Therefore, going forward in the event of any further loan and advances funded through debt to group companies need to be monitor.

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Hi @sagar.d0508

What’s the group structure and product comparisons between Ind Swift Laboratories (780 Cr Mcap) vs Ind Swift Ltd (120 Cr Mcap)? There seems to be 1000+ Cr debt in the books of Ind swift limited.

Is there any clear ideas about these two companies’ operations and RPTs?

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Pe is less than 6 because of other income of 432 crore exceptional item this was one time adjustments.

Equity capital is 59 crore at the market cap of 780crore

I think this is so much.

one more fpo coming share capital
Would be increased. Am I right here please provide some info if possible. Tgankyou

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Auditors have resigned in this company citing irregularity.

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Dear @robin1 , As per the disclosure dated 6 Aug 2024 made by Auditor Avishkar Singhal and Associates (who did audit of FY 23-24 and limited review for the quarter ended Jun 2024) have confirmed that the reason for resignation is “personal reasons and pre occupation in other professional assignments”. Further, they have clarified by Auditor in the statement that “our firm neither have any sort of dispute nor have any concern relating to suppression of information by the management of the Company for the purpose of carrying out audit procedures.” I hope this clarifies your concern. If you still have any other observation then please feel free to share with us. Thank you.
Relevant extract of the submission by Auditor is captured as under:

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image548×720 110 KB

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Thanx for the overview. But only Equity Capital makes no sense till the time you don’t add reserves (i.e. other equity). Equity Capital is just a book entry based on Face Value. But it doesn’t consider profits added back, premium amount paid to acquire equity etc.

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Below I see red flags. Pls let know in case you have other point of view.

Red Flags:
API & CRAMs business which company sold off accounts for 96% of turnover. So almost entire business is gone. With the money, company is reducing debt but company also approved unsecured loan to In-Swift Ltd which is another group company.
Going forward In-Swift Labs will merge with In-Swift Ltd. In-Swift company has increased borrowing limits from 1500 Crs to 2000 Crs. Market cap of In-Swift is only Rs 129 Crs

So question is where are minority shareholders? What are company’s future plans for its remaining core business?
Note - Company has done warrant issue that’s positive sign. But company doesn’t do concall, not distributed any dividend for last 13 yrs.

My Assessment: Unless someone is doing ground level scuttlebutt, very difficult to judge what’s happening inside.

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Hi @ShaileshN ji and @deepuji2008 ji,

I have taken note and agree with your views, but please consider the following points as well. Your updated views and further thoughts are also welcome.

Dear @zain,

Please find below additional points for your query:

  1. Merger of ISL and ISSL: I have concerns regarding the proposed merger of Ind Swift Ltd (ISL) and Ind Swift Laboratories Ltd (ISLL). The significant debt of ISL was taken over by ISLL as outlined below (without considering the interests of minor shareholders):

“In terms of the Loan Agreement dated March 30, 2024, Ind Swift Laboratories Limited has taken over the entire debt of ISL from Edelweiss Asset Reconstruction Company Limited (EARC) amounting to Rs. 815.68 Crores. This debt has been restructured into a term loan facility of approximately Rs. 353 Crores, payable over 9 years at a 10% interest rate, including a 15-month moratorium on principal and interest payments (though interest will accrue monthly). The unsustainable portion of Rs. 463.17 Crores is treated as zero-coupon debt, payable fully in case of default on the term loan facility, but will be waived upon successful repayment.”

The major concern of ISL’s substantial debt of around INR 1000 Crores has been addressed to the extent of INR 815.68 Crores, as mentioned above. Additionally, ISL’s business is generating operating profits, and the losses were primarily due to high-interest costs. Since the debt has been addressed, it is better to merge both companies, utilize the operating profits from ISL’s business to pay off the interest, and potentially expand the formulation business.

Regarding the share exchange ratio, please note the following point from the outcome of the board meeting dated May 18, 2024:

The Valuation Report dated May 16, 2024, issued by Ajay Kumar Siwach, Registered Valuer- Securities or Financial Assets (Registration No. IBBI/RV/05/2019/11412), based on the Audited Financials of each of the Companies as of March 31, 2024, was presented to the Board for consideration. A Fairness Opinion dated May 17, 2024, obtained from 3Dimension Capital Services Limited, a SEBI-Registered Category-I Merchant Banker, on the above valuation report issued by Mr. Ajay Kumar Siwach, Registered Valuer, was also presented to the Board. The exchange ratio was finalized at 15:100 ISLL

, where “Ind Swift Laboratories Limited” (Transferee Company) will issue and allot 15 (Fifteen) Equity Shares of Face Value of INR 10.00/- each to Equity Shareholders of “Ind Swift Limited” (Transferor Company) for every 100 (One Hundred) Equity Shares of Face Value of INR 2/- each held by them in the Transferor Company.

  1. Issuance of Warrants for Future Growth: For the issuance of warrants, ISLL has undertaken the valuation of the Company on a NAV basis (apparently before the effect of the above debt takeover), which values ISLL at a minimum of INR 130 per share. The valuation report is available on this link.
  2. Promoters are Investing in the Expansion Business: ISLL is issuing warrants to promoters and non-promoters, amounting to INR 314.6 Crores at INR 120 per share. The proceeds from these warrants will be used for the following purposes:
Sr. No. Particulars Total Estimated Amount to be Utilized (₹ in Crores) Tentative Timeline for Utilization of Funds
1 For funding growth opportunities of the Company and its subsidiaries in India and abroad, including mergers, acquisitions, and strategic investments in pharma projects 200 December 31, 2026
2 Meeting long- and short-term working capital requirements of the Company and its subsidiaries 29.6 December 31, 2026
3 Issue-related expenses 10 July 31, 2025
4 General Corporate Purposes 75 December 31, 2026

The share warrants will be issued as follows:

Sr. No. Particulars Category No. of Warrants % Amount in INR (Crores)
1 Essix BioSciences Ltd Promoter Group 80,00,000 31% 96.80
2 HCP Investments Non-Promoter 75,00,000 29% 90.75
3 Saral Incorporated VCC Sub Fund 1 Non-Promoter 65,00,000 25% 78.65
4 Zeal Global Opportunities Fund Non-Promoter 40,00,000 15% 48.40
  1. Promoters are Committed to Investors: I completely agree that the promoters don’t care much about minor shareholders. This was also a common complaint during the recent AGM. However, since the promoters are investing INR 96.8 Crores of their own money into the expansion of the formulation business, they are likely serious about expanding this segment. We can bet on this aspect. Additionally, as per corporate communication on September 2, 2024, the promoter has acquired 80 Lakhs warrants. This confirms that they are investing their own money into this venture who is looking for turnaround on formulation business.
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