Revenue Mix :As of Q1 FY23, Windlas has ~79% of revenues coming from its CDMO vertical. ~18% revenues come in from trade generics and they have just started exports (non USA markets only) which contribute ~2% of sales
They claim to be amongst the top 5 players in the domestic CDMO space, supplying to customers like Pfizer, Sanofi, Cadila, Emcure, Eris and Intas amongst others (from DRHP - Page 134). In the latest Q1 FY’23 investor presentation, they also claim to be in all aspects of the value chain including CRO and CDMO depending on the customer, except in API manufacturing (Slide 11)
They claim to have a high product concentration in complex generics and from the chronic segment. The below slide mentions historical growth of CDMO business along with good growth in product offerings in the CDMO space coming from good R&D capability
Margin Mix : The company in different concalls claims to work on a cost plus model and hence not be largely positively/negatively affected by input prices/industry pricing interventions. Margin profile (GM ~36%, OPM ~11%) suggests a more manufacturing oriented CDMO model rather than a higher margin one based on IP/research. Interestingly, forays into the faster growing verticals of trade generics and international business are margin accreditive over the CDMO business, as can be seen from concall snippet below. These could be potential sources of margin expansion over the long term from current base apart from an upcoming foray into injectables.
Manufacturing Footprint and Potential for Operating Leverage
Below slides from investor presentation give a good insight into manufacturing footprint (through 4 plants, all in Dehradun) and R&D focus
What stood out to be that they are currently only at 40% capacity utilisation, which would mean that unit economics currently would not be too favourable. If they can deliver on their growth expectations in the next 4-5 years (Q1 FY 23 concall snippet below), this could provide substantial scope for operating leverage to play out and improve return ratios
There were also some good interviews with him around the IPO and he is the key person on the concalls. Link for a BQ interview below
Overall, they seem to be building a foundation for a solid senior leadership team. A cursory search on LinkedIn showed me 350+ profiles, including strong key leadership profiles including a CBO who is ex director sales at GVK Bio and a CFO who is ex DSM Sinochem
Thanks for starting this thread on Windlas.
I had come across this company few months back and was about to invest but then came across this twittr thread and it stopped me from investing in it especially when there are better opportunities available elsewhere.
I have gone through the thread, and it is a good piece of work which has come about during the IPO in August 2021. In fact I would even say that 1 year later now, the author has been proven right as valuations were very high (as usually are in several IPOs).
But then again, the situation currently is very different:-
The largest part of the thread addresses that the IPO pricing seemed aggressive and there was obviously an OFS component for the PE fund and the promoters. I would agree with the author at that time, at 50x PE it was very expensive and yes the PE fund did get an exit (even if the author thinks the IRR was not the best). I did not apply for the IPO myself inspite of liking the business then.
But currently the price is much lower then when the thread was written (INR 235 vs INR 460). My entry price is below current CMP. I felt at a sub 15 PE and 1.1 PS the risk reward was favourable taking into account these aspects.
The USFDA inspection was a big issue. But since then in concalls, the management has mentioned that after this issue, they have not really pursued the US markets as an active strategy for expansion but are instead focusing on growth through the core business of CDMO and trade generics in India, and some other export markets like South Africa. Inspite of questions on US growth, the management does not seem too keen to pursue the market. I do not mind the management not pursuing the US markets currently, I think the opportunities they are focusing on are large enough for a company their size
The author has mentioned some aspects with proprietorship firms and related party transactions. I am not sure if we can find a definite red flag in doing business with proprietorship firms. But the point on related party transactions is one point which would still be worth digging into.
That said, this is eventually a microcap with a limited history in the markets and as with most of them, there are risks and we will need to gauge with time if management delivers. There are also other potential anti thesis aspects, ones which I could think of I have already mentioned above.
Exports is the highest margin business ~margin wise Exports (+4-5%) > Trade Gens (5-7%) > CDMO. For CDMO they mostly work on formulations for MNCs which is eventually sold under MNC brand name. Are CDMO businesses meant to be a 10% OPM game? Possibly lower because they don’t add much value and serve as a low cost mfg resource for the big guys (unlike say Syngene, Laurus, etc).
Keeping current PE in mind, a possibility of a future re-rating cannot be ruled out (if nothing goes too wrong). If they are successful in doubling the revenues in 5 years and PE rationalizes to ~20, ROI could be around 3-3.5x - the risk-reward scenario needs a closer look to weed out any reg flags.