Eris Lifesciences IPO review: Dare to miss?

Seasoned sales and marketing executive Amit Bakshi’s Eris Lifesciences is all set to launch its IPO on 16 June. The offer, priced in the range of INR600 – 603 per share, will remain open till 20 June. Investors can place their bids in multiples of 24 shares. The IPO will be managed by Axis Capital, Citigroup Global Markets India, and Credit Suisse Securities India while Link Intime will be the registrar. Along with Eris, investors will have the choice of choosing between other mainboard IPOs of CDSL and Tejas Networks. This is likely to create a healthy competition in the market and let’s not forget, there are a few SME IPOs also in the fray – Globe Textiles and Riddhi Corporate Services – which means that investors are spoilt for a choice.

Through Eris Lifesciences IPO review, we try to find out if it makes sense for investors to put money in Ahmadabad-based specialty pharmaceutical player. Here are some important details about the public offer.

Eris Lifesciences IPO Review: Full OFS, ChrysCapital to exit

As we mentioned in an earlier write-up, all the shares offered in Eris Lifesciences IPO will be sold by existing shareholders through an Offer for Sale (OFS). As a result, the company will not get any money from the IPO.

In total, 28,875,000 shares will be offered in Eris Lifesciences IPO. The biggest chunk of the shares will be sold by private equity major ChrysCapital. Through its arm Botticelli, the PE firm owns 22,344,000 shares or 16.25% equity stake in the company and will be selling all the shares. In addition, company CEO Amit Bakshi plans to offload 687,500 shares or 0.5% stake in company. Following the sale, Bakshi will still be the largest shareholder in the company with nearly 39.47%. Other investors selling their shares include Rajendra Patel (1,031,167 shares), Kausal Shah (1,031,167 shares), Inderjeet Negi (1,031,167 shares), and Bhikhabhai Shah (1,375,000 shares).

We hate to see PE firms fully exiting their portfolios through IPOs. PE investors are mostly on boards of their portfolio companies and thus, have critical information about the future plans and prospects. As a result, full exit by PE investor may be a sign of limited growth going forward.

Eris Lifesciences IPO Review: Generics but only high margin

Even though operating as generics players, Eris Lifesciences is essentially a specialty pharmaceutical player as it focuses on high margin products. These include lifestyle-related super-specialty niches such as diabetes and hypertension. This clear focus on high margin products not only allowed the company to grow at a faster clip but also attracted flagship PE firm ChrysCapital. This aspect of the business strategy couldn’t have come early in Eris Lifesciences’ life if not for founder CEO Amit Bakshi’s past experience in the industry. Before starting Eris in 2007, Bakshi had spent nearly 12 years in the pharmaceutical industry. Majority of this experience was in sales and marketing functions at Torrent Pharma, Ely Lilly and Intas.

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Eris LIfesciences’ differentiated business model has a high level of dependency on specialists and super specialists such as cardiologists, diabetologists, endocrinologists and gastroenterologists. Sale of products in cardiovascular, anti-diabetics, vitamins and gastro-intestinal therapeutic areas contributed 32.7%, 28.9%, 13.7% and 9.3%, respectively, towards its revenues for FY2017. As of 31 March 2017, the company’s product portfolio comprised of 80 brand groups. As demonstrated in the chart below, Eris Lifesciences stacks pretty well against leading players like Sun Pharma, Lupin, Glenmark and Mankind.

Eris Lifesciences IPO Review: Financial performance

More often than not, excellence in any form needs to translate into strong financial performance for a good investment and we find it is no different in the case of Eris Lifesciences IPO review. Eris Lifesciences closed FY2017 with revenue of nearly INR725 crore, up 21.4% from last year. In the last four years, its top line has grown at an average 16.5%. Shining even more beautifully is the profitability department where earnings improved from INR58.2 crore in FY2013 to INR242 crore in FY2017. This translates into an awesome growth rate of 42.8% on an average. We absolutely love this.

Good news for prospective investors is on the margin front. The company has consistently earned profit margins in double digits but it has improved further in recent years. In fact, profitability improved every year except FY2014 and stood at 33.4% in the most recent year.

Source: Eris Lifesciences’ RHP

Eris Lifesciences IPO review: Should you invest?

As we have pointed so far, the company has several positives in its favor. Presence of an investor like ChrysCapital, strong business growth, and improving margins are some of these positives. Many of these factors are likely to remain in the company’s favor for coming several years. By 2020, India is expected to become USD27.9 billion pharma market and it doesn’t take rocket science to understand that cases of lifestyle diseases such as heart ailments and diabetes are going to outperform. As a result, the company be placed very well structurally speaking. Chances of competitors snatching away market share or playing with pricing are always there but the management’s track record so far is reassuring.

This leads us to valuations as the most important deciding factor. Almost everything good becomes bad at a high enough price. The stock market is rewarding companies with high growth rates. However, it may be a perfect trap for investors into overpaying for growth.

With Earnings Per Share (EPS) of 17.61, the upper end of the IPO price band values the business at PE ratio of 34.24. This is evidently high as bigger players like Sun Pharma and Alkem Laboratories are available at lower valuation multiples. Nevertheless, these bigger peers are no match when it comes to revenue growth and margins. Eris Lifesciences also has superior Return Of Net Worth (RONW) of 44.84%. Unlike these bigger peers, Eris has very little dependency on the US market where the FDA is playing spoilsport. Eris is almost totally a domestic growth story and within the realm of defensive pharma sector, it is not difficult to see there will be many buyers on the institutional side as well.

In conclusion of Eris Lifesciences IPO review, this comes across as a strong growth opportunity, although valuations are evidently stretched and don’t offer comfort. However, it appears to be one of those stories where growth will be rewarded positively.