Supriya Lifescience Ltd - pure play API

[Chandragupta]

Company introduction

Supriya Lifescience Ltd. (SLL) is a manufacturer and supplier of active pharmaceuticals ingredients (“APIs”). The company was started as a partnership firm by Satish Wagh, a first-generation entrepreneur and converted into a limited company in 2008.

SLL has its main plant at Lote, around 250 km from Mumbai and exports APIs to a large number of countries across the world. As an API manufacturer, the principal competitors for SLL in India include Divi’s Laboratories, Wanbury, Unichem, Mangalam Drugs, IPCA and Teva API which operate in similar therapeutic areas as SLL. In foreign markets, the company competes with respective regional players and multinationals.

The business

The main facility at Lote is spread across 23,806 sq. mts. having reactor capacity of 547 KL / day where the company presently operates 7 clean rooms. It also has a DSIR approved R&D facility. SLL’s R&D efforts are primarily focused across the value chain of API process development. As on 31st March 2022, SLL had a team of 26 scientists.

The key products of SLL such as Cetirizine Dihydrochloride, Diphenhydramine Hydrochloride, Chlorpheniramine Maleate and Pheniramine Maleate are in the therapeutic segments of anti-histamine and anti- allergic, which are widely and commonly prescribed drugs for treatment of common cold, cough and flu. Ketamine Hydrochloride is in the therapeutic segment of pain management. The company is in the process of further diversifying its product portfolio.

As of March 31, 2022 the company had niche product offerings of 38 APIs focused on diverse therapeutic segments such as antihistamine, analgesic, anaesthetic, vitamin, anti-asthmatic and antiallergic. The company has consistently been the largest exporter of Chlorpheniramine Maleate and Ketamine Hydrochloride from India, contributing to 45-55% and 65-70%, respectively, of the API exports from India, between Fiscal 2017 and 2020. It was among the largest exporters of Salbutamol Sulphate from India in Fiscal 2020 in terms of volume.

A brief overview of the company’s financials is given below:

As can be seen, the company has posted consistent growth in both top line & bottom line along with good margins.

In Fiscal 2022, SLL’s products were exported to 86 countries and to 1,200 customers. The company has grown its API business in several countries. Region wise distribution of exports is given below:

Region	% of revenue in FY22
Asia	51
Europe	30
LAC	12
North America	3
Others	4

The company’s products are approved by various international regulatory authorities such as USFDA, EUGMP, EDQM, SFDA NMPA, ANVISA, KFDA, PMDA, TGA and Taiwan FDA.

The business mix by therapy is given below:

Backward integration

One of the key strengths of SLL is backward integration. As on date, 12 of the company’s products contributing around 65 - 70 % of the total revenue are backward integrated, with more in the pipeline. For these products, SLL produces the KSM (Key Starting Material) themselves and controls the various stages of production such as n-2, n-1 etc. This has resulted in increased margins and lesser dependence on external suppliers.

The company sources most of its raw materials from India, China, South Korea and Belgium. The management says around 50% of the raw materials are imported, of which 26% are from China

In the recent past, the focus of the company has been to ensure sustained and consistent performance through development of newer molecules, penetration in newer geographies and convert CMO / CDMO opportunities. In order to further increase its competitiveness and cater to future expansion plans, the Company has strengthened its team by making senior level hiring in operations, research and business development and plans to continue to hire for other functions as well.

As per the management, their plants are currently running at full capacity.

Promoter

Satish Wagh, a first-generation entrepreneur is the Chairman and Managing Director of the Company. Mr. Shireesh Ambhaikar is the CEO and Mr. Ashish Ramdas Nayak is the CFO. The promoter’s two daughters, Ms. Saloni Wagh – a Ph.D. in chemistry & Ms. Shivani Wagh – an MBA from Manchester are also actively involved in running the business.

The management appears to be having a clean record on governance. As on the date of the DRHP, there are no outstanding criminal proceedings, actions taken by statutory or regulatory authorities, claims related to direct and indirect taxes and material litigation involving the Company, Promoter and Directors.

Post the IPO, promoter stake in the company stands at 68.24%.

Future Plans

Going ahead, the company plans to focus on expansion of manufacturing capabilities, expanding product portfolio with increasing R&D capabilities, increase current market presence and enter new markets. A foray into CMO / CDMO business is also being planned.

The company is building two new R&D centres, one in Lote and another in Ambernath. The Lote centre will cater to lifecycle management and further backward integration projects. This is expected to be completed by Q2 FY23. The Ambernath centre will cater to new molecules and CMO / CDMO business. Further, the company plans to expand the controlled drugs portfolio for which identification of potential APIs have been done and are in development pipeline. It is also evaluating product portfolio expansion by selecting products in anti-diabetic and CNS range.

The company is also focusing on improving infrastructure, which includes debottlenecking and the development of new manufacturing blocks. For future expansion, company has acquired 80,000 sq. mts. on lease from MIDC at Isambe Industrial Park dedicated to manufacturing of APIs & Drug Intermediates. In addition, the company has acquired a plot of land, measuring 12,400 sq. mts. near the existing facility at Lote for future expansion.

With various expansion projects, the total capacity will increase from 547 KL to 810 KL by Q1 FY24

For regulated market, regulatory team is registering products and filling DMFs. Sales team is in discussion with new customers to qualify Supriya as source. Sending of samples and supplying APIs for customer validation of products has already started.

SLL has also initiated discussion with various companies ranging from big pharma to innovator companies to work as a partner for supplying products as per their needs for its CMO / CDMO foray. Currently, work on 5 such projects is going on.

The company has no plans to get into formulations.

Listing & thereafter

SLL came out with an IPO in December 2021. The IPO consisted of an Offer For Sale by the promoters to the tune of Rs.500 crore and a fresh issue of shares of Rs.200 crores. The issue was subscribed 71.5 times and shares listed on the NSE and BSE on 20th December 2021. The offer was priced at Rs.274 per share and listed at Rs.425 per share. Currently, the shares are trading at Rs.358 per share, well above the offer price. At this price, the stock is having a market cap of Rs. 2,885 crores and is available at a trailing P/E of 19 times.

Sources of information: DRHP, Investor presentation, analyst concalls, industry reports.

Important Links:
Supriya Lifescience DRHP
Investor Presentation Q4 FY22
Transcript of Earnings Call Q4 FY22
Company Website
Active Pharmaceutical Ingredients (API) - Sector Report.pdf (2.2 MB)

(Disclosure: Tracking, no position as yet)

[Khanemc2]

Thank you for sharing the detailed summary.

Could you please throw some light on what % of their revenue is commodity/generic API and niche API?
If their revenue have high generic API then how they are able to maintain 40% of OPM where as generic API at other pharma companies like Neuland labs have very low margins?

If they have moat of backwards integration and lowest cost producer then why it is not being appreciate by the market, even today it’s trading at just 12 time EVEBITDA ?

[kalidasa]

I have been tracking Supriya for the last few months.

why it is not being appreciate by the market

There are multiple cases of recent IPO stocks that provide a window of opportunity to get a good price. Reasons why this may happen:

• Company is new in the public market, so “untested”. Personally I don’t see this as a valid reason for Supriya.
• The market is probably pricing the recent increase in topline and bottomline as transitory. This happens in commodity businesses. Again this does not apply to Supriya.
• An investor can assume that the recent correction in the stock price was due to a general correction in the whole chemicals sector. However, this correction was unjustified in case of Supriya IMHO.

Disclosure: Tracking position. Probably will add more.

[niraj]

Thank you @Chandragupta for starting this thread on Supriya. You have done excellent research and most of the relavent points are covered nicely. I have been following all the developments in this company since the IPO days, if things fall in place as planned there is a high chance that it may turn out to be the next Divis. Thats kind of an optionality which may play out. And even if it dosent, buying at these valuations will be able to protect our capital because at this price we are not paying for the growth.

Capacity utilization will be low till all the plants get fully operational ( continuous capex planned for next 3-4 years which will double thier capacity from present levels) but sales is likely to shoot progressively that too without debt. Operational leverage will also come into play for next 1-2 years after this capex. Lastly, any success on CMO/CDMO can lead the stock price to next orbit.

Disclosure: One of my largest holdings. Transactions in last 30 days.

[tanishq]

I would like to use the word ‘blitzscaling’ when it comes to the capacity additions done by the company since it’s DRHP.

1. In the DRHP, co. mentioned that they would increase their capacity from 332 KL to 547 KL Per day which itself is a 65% increase in capacity - D Block

2. Co. did it successfully and then they said they would expand to 750 KL by replacing an old block of 150 KL with another of 350 KL which would be another 37% increase in capacity - E Block. This will become operational in 12 months.

3. They also mentioned replacing another 150KL block with one of 600 KL in the next 3-4 yrs which is a bit far away.

4. Also, another 70 KL capacity coming up in Ambernath in their RnD center.

5. Also, bought a land for Potential CMO or CDMO opportunities!

In a mgmt meet in Feb’ 22, the co. said - ** When we raised the funds through the IPO, at that time, we had a Capex of around Rs 90 crore but due to the availability of good opportunities, we are anticipating higher Capex **

Shows that the company is seeing some real strong demand. Such rapid capex in such a short time is impressive at the least.

Disc - Invested.

[niraj]

@tanishq yes, absolutely. If we think from principles of fundamental investing than most of the wealth is created when a high ROCE business is capable of putting the incremental cash flow in the core business without diluting thier ROCE. Different investors explain this in different different fancy languages like having moat, having pricing power, long runway, sales growth, able to maintain margins, stability of cash flows etc etc.

Supriya seems to have exhibited these qualities in a limited span of 2 quarters of listed history and many years before that in thier unlisted journey. Thier EBIDTA margins are 40%, net profit margins are 30% and ROCE is 60%. They have a able team which keep on researching on new products and geographies. Thier sales growth data and margins shows thier is no doubt regarding demand of thier products or thier pricing power. If they can deliver on the capex timelines then the results can be beyond imagination. There is no reason to believe they cannot, the vision of the management is very clear. They have been proactive in aquiring land and timely approvals for the future capex.

They have recently cleared inspection by a European agency. Thier plant is also a US FDA approved facility. No more inspections are lined up in the near future.

The management seems to be very capable and visionary. The promoter Mr Satish Wagh who is very experienced is the chairman. The company is being run by professional CEO and CFO. Mr Wagh’s both daughters are actively involved in the business and seems very capable. They will be ready to take bigger responsibilities whenever required. So there is no issue with respect to succession planning also.

[Chandragupta]

Valid question. I could not find any specific reason attributed by the management for their margins vis-à-vis competition.

My understanding is that all their products are technically generic (i.e. out of patent) APIs. However, within this the products are niche with a high level of complexity or some other such entry barrier and hence have limited competition. For example, ketamine hydrochloride where the company is one of the top 2 producers globally is a narcotic product with a multi stage process and under tight regulation. The company produces it right from the basic chemical stage to the finished product.

So besides full backward integration and increasing presence in regulated markets, the choice of molecules is also responsible for high margins.

[Mudit.Kushalvardhan]

All API players are increasing Capex in coming 2 to 5 years. Will this lead to oversupply situation and hence margin contraction?

[mohit1795]

Thanks @Chandragupta for starting this thread. All the numbers looks really good. Need to dig deeper into each APIs and the complexity of their production(more the complexity, better the moat). If this figures are sustainable it might be a great opportunity.

[sameernics]

I have been comparing the stock performance of Supriya’s peers mentioned in their DRHP. All those stocks and in general API stocks have underperformed since last few months. Need to dig deeper, what are those concerns and headwinds.

[kalidasa]

While the overall situation of Covid- and war-related disruptions is common to the whole industry, all these peers named in the DRHP cater to different APIs with very different market dynamics. Supriya has around 40% operating margin and the lowest PE at around 19 among the peers (other than Warbury which made losses this year). Most of peers listed in the DRHP, namely, Solara, Neuland, Aarti Drugs and Warbury have 10-20% operating margin, which means they cater to very different products. Divis has around 40% operating margin and is trading around 52-week lows, but still has PE of more than 30. Of course, it is a much larger and established company.

Capacity expansions in one API would be successful if there is demand, and this has little-to-nothing to do with unrelated APIs. What matter is how conservative the management is in evaluating the market dynamics and avoiding overcapacity. From the concall, Supriya management came across as conservative. The flip side is delayed expansion which I understand from news reports is one reason behind the correction in Divis.

Since the stock price of all the peers are correcting, except in highly exceptional situations, it is expected that the price of Supriya will also correct, even from the lower PE level. Supriya IPO issue price was Rs 274 and it listed at Rs 425. There may be profit booking going on right now.

[Mudit.Kushalvardhan]

You have said that delayed expansion is reason behind correction in DIvis…But what I heard was, its due to specific molecule related with covid drugs, whose sale will go down in near future and contibuted majorly in last few quarters…kindly elaborate

[Aniesh7]

Source : IPO report sp tulsian

[KeshavKumar]

Beg to differ.

Moat is something sustainable. A couple of quarters (or even years) here and there say nothing about it. For pharma and chemical companies, it mostly lies in the science. Scale is also important because it helps fund the science part.

Look at IOL. Being the largest Ibuprofen player, when the tailwinds were strong, they did phenomenal margins. Just like any other commodity cycle playing out, their margins succumbed and got pressed when the demand supply situation changed detrimentally.

Though the initiatives taken for backward integration and market development are good in a generalistic sense. But the basket of molecules isn’t that easily forecastable. And the scale combined with the above is something personally I would monitor from a distance till there’s better clarity about what will drive Supriya for next 10 years.

Discl: Watching with no intention to buy

[Ravi_Hegde]

My main concern with SupLifSci is the high product and region concentration. Analgesics 40%
and Europe. It is also not clear if the backwatd integration is specific to the analgesics. What is the China risk? Generics are a pure commodity play with no customer stickiness. CDMO Crams
hasn’t even started (very competitive). Supriya did find a nice niche for themselves so far. It’s not clear why they enjoy such a high margin for a generic molecule, is it a one off lucky streak (china factory shut off? I dunno). Because of this ignorance, I cannot confidently see how these high margins will last.

The broader pharma pack is witnessing downturn making many other solid pharma names affordable. Why gamble on an untested name when better bargains are there.

I am happy to hear opposing views.

Disclosure - I am retarded, not a recommendation either way! Not invested,

[niraj]

I agree sir. We have to track the complexities in the type of molecules and thier expertise in process chemistry. And also how and what type of molecules they are planning to expand into. Every multibagger type of opportunity starts with litle bit of assumptions because when everything is visible clearly, there is nothing much left on the table. High margins and high ROCE in the last few quarters provides confidence here to start with.

[kalidasa]

There is growth and there is EBITDA margin. Top products command high margin and their demand is increasing. For example, Ketamine, with 25% revenue share, is recently finding new use for treating major depression. The management indicated that the demand for their top products does not have much to do with China. Thus the impact of Covid is likely to be minimal.

CDMO/CMO contribution in the future will reduce the margin but increase the stability and reduce the risk due to product concentration.

They launch new products first in the semi-regulated markets with lower margins and then after 1-2 years in the regulated markets with higher margins. This is another factor that may reduce the overall margin. In the previous concall, the management has, understandably, not indicated that the current overall margin will sustain.

If the above assumptions hold, in the long term, we can assume 30% as a likely lower bound of the margins. PE ratio may remain low (below 30) for many years due to the product concentration risk. If so, the company will generate tons of cash and growth, but the valuations PE-ratio will not become too expensive.

[tanishq]

Management has guided for 38-40% margins.

Even for me, the most interesting Product in their Portfolio is ketamine and esketamine for which the applications are increasing and thats why it can be seen that anesthetic has grown signficantly as compared to other Products. The Procedure for making these Products is also ’ not commoditized’ and requires a very differentiated setup specially to export to regulated countries which have a very strict criteria.Therefore, both these Products have less competition as can be seen in the CEP and US approved list for both of these Products.

But, the key to high margins in the future is to find such Products on a regular basis where they can command such margins which is totally dependent on management’s execution which is the major risk for me. But, i also think that in CMO or CDMO, they can get their target margins.

Growth according to me will be very strong here and will not be an issue but margins are something that need to be tracked like a hawk.

I think in a Post- Covid world, the CMO/CDMO clients are looking for supplier companies who are reliable, who can Protect their IP and Provide supply chain security where they can get consistent timely deliveries and supriya because of its geographical Presence, backward integration and successful track record of audits has become a Preferred candidate for such contracts.

Saw a number of interviews where Dr Satish Wagh said that we do not raise Prices and they really seem customer-centric which is a major Plus.

DHANDHA: Supriya Lifescience Ltd.

From 31:40 - ’ During the container shortage, Supriya never asked for any PRice change, even the customers were voluntarily asking to share the freight. Some of our customers say Supriya is like a JV with them’

If i put myself in their customer’s shoes, i would definitely like to give more of my contracts or orders to such a supplier who is willing to take an extra step for me. To me personally, more than the numbers - these key qualitative insights really tell about the quality of a company

[iyeron]

@tanishq @Chandragupta
Any idea on the opportunity size of each product/API and Supriya’s marketshare?

[iyeron]

Research report from CRISIL: -
CRISIL-Research_Market-final-report_with-addendum-July-Nov-2021_30112021.pdf (2.5 MB)

Sections 4 & 6 has relevant information (presumably accurate) showing growth prospects
across the different therapeutic areas and the molecules under each. Supriya
currently operates in almost all given therapeutic areas.

Based on the above, an apple to apple comparison (more close) for Supriya would be Divis, Teva and possibly Wanbury.

One thing I found strange though is Supriya seems highlighted at multiple places in the report as if this report was prepared by CRISIL to promote Supriya. Moreover, ICRA had moved its rating to “Issuer not co-operating” category in May 2021 and subsequently took it down in June 2021.