IPO Analysis: Valiant Laboratories Ltd

IPO Rating: Avoid

About the Issue: 

Valiant Laboratories Ltd is a prominent pharmaceutical ingredient manufacturer in India, specialising in the production of Paracetamol API/Bulk Drug. The company is gearing up to launch its Initial Public Offering (IPO) for equity shares, each having a face value of Rs 10. The IPO price range is set between Rs 133 and Rs 140 per equity share, resulting in a total issue size of Rs 152.46 crore at the upper price band. 

The IPO is scheduled to commence on September 27, 2023, and will conclude on October 03, 2023. The anticipated listing on the exchange is set for October 09, 2023. The market lot size for the IPO is 105 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 1,365 shares or a total investment of Rs 1,91,100 assuming the upper price band.  

Objects of the Issue 

The company plans to allocate the net proceeds raised from the issue for the following purposes: 

1. Investment in the company’s wholly-owned subsidiary, Valiant Advanced Sciences Private Limited (VASPL) for part-financing its capital expenditure requirements in relation to the setting up of a manufacturing facility for speciality chemicals at Saykha Industrial Area, Bharuch, Gujarat (Proposed Facility) 
2. Investment in VASPL for funding its working capital requirements 
3. General corporate purposes 

Promoter holding 

Shantilal Shivji Vora and Dhanvallabh Ventures LLP are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of 100 per cent in the company. 

Company profile

Valiant Laboratories Ltd, an integral component of the Aarti Group of industries, stands as a prominent pharmaceutical ingredient manufacturer in India. Boasting a rich legacy spanning four decades, the company specialises in the production of Paracetamol API/Bulk Drug, widely recognized for its versatility in treating ailments ranging from headaches and muscle aches to arthritis, back pain, toothaches, and colds and fevers. Valiant Laboratories Ltd operates from its singular manufacturing facility located in the Tarapur industrial estate. 

Financials

Outlook and Valuation  

The Indian pharmaceutical industry contributes significantly to the global market, ranking third in terms of production volume and fourteenth in terms of value. It offers more than 60,000 generic brands. Generic medications, over-the-counter medications, API/bulk drugs, vaccines, contract research and manufacturing, biosimilars and biologics are some of the major segments of the industry.  India has earned its reputation as the ‘pharmacy of the world’ by manufacturing generic medications and vaccines of the highest quality at affordable prices. Because of its industry standards compliance, enormous production capacities, and considerable number of skilled domestic workers, Indian exports meet the standards and needs of the highly regulated markets of the United States, the United Kingdom, the European Union, and Canada. 

The Department of Pharmaceuticals established an umbrella scheme called 'Scheme for Development of Pharma Industry,' which includes various sub-schemes, with special assistance, aimed at the bulk drug and medical device industries. Therefore, the industry is positioned to experience growth in the upcoming years. 

Evaluating the company's financial performance, the company achieved significant revenue growth, but it's essential to highlight that borrowings have also shown an increase over the same period. It has maintained a three-year average RoE of 38 per cent. However, profitability has displayed inconsistency, marked by a continuous decline in operating profit over the past three years.  

The issue is priced with a P/BV ratio of 4.54 times, calculated using its Net Asset Value (NAV) of Rs 30.86 as of March 31, 2023. At the upper price cap, it is priced at a P/BV ratio of 2.41, considering its post-IPO NAV of Rs 58.22 per share.  

When we compute the PE ratio for the company by considering FY23 earnings to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 21. In its official documents, the company has identified Granules India Limited and Jagsonpal Pharmaceuticals Limited as its listed peers in the market. As of the latest available data, these peers are trading with price-to-earnings (PE) ratios of 19 and 35, respectively.  

When contemplating the company's future prospects, it's important to recognize that it operates as a single-product-focused entity, with a primary emphasis on the Paracetamol API market. Any alterations in product demand or regulatory modifications have the potential to impact the company's operations significantly. Furthermore, the company's heavy reliance on its top three suppliers and top five customers, who contribute a substantial portion of raw materials and revenue, respectively, presents a potential challenge if unforeseen issues arise. Therefore, we recommend investors to avoid this IPO, given its associated risks.