Zenith Drugs NSE SME IPO review (May apply)

• The company is in the pharmaceutical business, having manufacturing and trading activities.
• The company has an expansion plan afoot along with modernization of existing unit.
• Though the company posted growth in its top lines for the reported periods, sudden boost in its bottom lines from FY23 onwards raise eyebrows and concern over its sustainability.
• Based on FY24 annualized super earnings, the issue appears fully priced.
• Well-informed investors may park moderate funds for the medium term rewards.

ABOUT COMPANY:
Zenith Drugs Ltd. (ZDL) is a pharmaceutical manufacturing and trading company based out from Indore. It has a manufacturing unit, dedicated to ensuring the highest quality standards when it comes to manufacturing of medicines. ZDL is specialized in manufacturing high quality and affordable Medicines to support patients in need. The Company is also into Generic Medicines that are cost effective.

Since its inception the company has focused on building a strong foundation and laying the groundwork for its future growth and success. With dedication and strategic planning, it managed to establish a reputable presence in the pharmaceutical industry.

With a passion to set high standards of services, the company has always taken all measures to scale up as and when required only to deliver the better. It works diligently and have a wide range of products to cater to every need and to reach the client sensitivity and centricity.

Currently, the Company is having FDA approval of more than 600 Products from Food & Drugs Administration. Out of which, 325 products are being Manufactured Regularly.

As of March 31, 2023, there are total of 89 employees out of which 61 are on payroll basis and 28 employees are on contract basis.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden book building route IPO of 5148800 equity shares of Rs. 10 each (worth Rs. 40.68 cr. at the upper cap) It has announced a price band of Rs. 75 – Rs. 79 per share. The issue opens for subscription on February 19, 2024, and will close on February 22, 2024. The minimum application to be made is for 1600 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on NSE SME Emerge. The issue constitutes 30.02% of the post-IPO paid-up capital of the company. From the net proceeds of the IPO funds, it will utilize Rs. 10.61 cr. for purchase of machinery and other equipments for setting up of new unit, Rs. 2.11 cr. for upgradation of existing unit, Rs. 12.00 cr. for working capital, and the rest general corporate purposes.

The issue is solely lead managed by Gretex Corporate Services Ltd., and Bigshare Services Pvt. Ltd. is the registrar of the issue. GRETEX Group’s Gretex Share Broking Ltd. is the market maker for the company. The issue is underwritten by Gretex Corp. and Gretex Share on a 50 :50 basis.

Having issued initial equity capital at par, the company issued further equity shares at a fixed price of Rs. 20 per share between August 2025 and December 2015. It has also given bonus shares in the ratio of 29 for 1 in September 2023. The average cost of acquisition of shares by the promoters is Rs. 0.20, Rs. 0.56, and Rs. 0.63 per share.

Post-IPO, company’s current paid-up equity capital of Rs. 12.00 cr. will stand enhanced to Rs. 17.15 cr. Based on the upper IPO price band, the company is looking for a market cap of Rs. 135.48 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has (on a consolidated basis) posted a total income/net profit of Rs. 73.52 cr. / Rs. 3.03 cr. (FY21), Rs. 92.67 cr. / Rs. 3.13 cr. (FY22), and Rs. 115.70 cr. / Rs. 5.15 cr. (FY23). For H1 of FY24 ended on September 30, 2023, it earns a net profit of Rs. 5.39 cr. on a total income of Rs. 69.48 cr. The sudden boost in its bottom lines from FY23 onwards raise eyebrows and concern over its sustainability.

For the last three fiscals, it has reported an average EPS of Rs. 3.44, and an average RONW of 29.23%. The issue is priced at a P/BV of 4.19 based on its NAV of Rs. 18.87 as of September 30, 2023. The IPO ad is missing data on its post-IPO NAV.

If we attribute annualized FY24 earnings to its post-IPO fully diluted paid-p capital, then the asking price is at a P/E of 12.56. Thus the issue appears fully priced.

For the reported periods, the company has posted PAT margins of 4.13% (FY21), 3.42% (FY22), 4.50% (FY23), 7.79% (H1-FY24), and RoCE margins of 36.52%, 30.08%, 37.29%, 28.71% respectively for the referred periods.

DIVIDEND POLICY:
The company has not declared any dividends for the reported periods of the offer document. It will adopt a prudent dividend policy based on its financial performance and future prospects.

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Sudarshan Pharma and Sigachi Ind. as their listed peers. They are trading at a P/E of 19.8, and 48.4 (as of February 14, 2024). However, they are not comparable on an apple-to-apple basis.

MERCHANT BANKER’S TRACK RECORD:
This is the 21st mandate from Gretex Corporate in the current fiscals, out of the last 10 listings, 3 opened at discount, 1 at par and the rest with premiums ranging from 4.26% to 90% on the date of listing.

Conclusion / Investment Strategy
The company is in the pharma business with manufacturing and trading activities. It posted growth in its top lines for the reported periods, but sudden boost in its bottom lines from FY23 onwards raise eyebrows and concern over its sustainability. Based on FY24 annualized super earnings, the issue appears fully priced. Well-informed investors may park moderate funds for the medium term rewards.
Review By Dilip Davda on February 14, 2024