Valiant Laboratories coming with IPO to raise upto Rs 152.46 crore

Valiant Laboratories

• Valiant Laboratories is coming out with a 100% book building; initial public offering (IPO) of 1,08,90,000 shares of Rs 10 each in a price band Rs 133-140 per equity share. 
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on September 27, 2022 and will close on October 03, 2023.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 13.30 times of its face value on the lower side and 14.00 times on the higher side.
• Book running lead manager to the issue is Unistone Capital.
• Compliance Officer for the issue is Saloni Mehta. 

Profile of the company

The company is an Active Pharmaceutical Ingredient (API) / Bulk Drug manufacturing company having focus on manufacturing of Paracetamol. Bulk drugs/Active Pharmaceutical Ingredients (API) serve as raw materials for manufacturing finished dosage forms or formulations. Paracetamol (Scientific name: Acetaminophen or para-hydroxyacetanilide - C8H9NO2), is one of the most commonly taken analgesic worldwide and is recommended as the first-line therapy in pain conditions by the World Health Organization (WHO). Paracetamol has several applications such as usage in treatment of headaches, muscle aches, arthritis, back aches, toothaches, cold and fever. The company manufacture Paracetamol in various grades such as IP/BP/EP/USP, as per the pharmacopeia requirements of its customers. Paracetamol was initially approved by the U.S. Food and Drug Administration (USFDA) in 1951 and is available in a variety of forms including syrup form, regular tablets, effervescent tablets, injection, suppository, and other forms. Paracetamol is often found combined with other drugs in many over the counter (OTC) allergy medications, cold medications, sleep medications, pain relievers, and other products.

The company was originally formed in year 1980 as a partnership firm under the Indian Partnership Act, 1932 under the name and style of ‘Bharat Chemicals’ and gradually, commenced manufacturing of Paracetamol by late 1982. In August 2021, its partnership firm was converted into a public limited company registered under the Companies Act. Its manufacturing facility is located at Plot nos. L-13 and L-30, Tarapur Industrial Area, Boisar, Palghar- 401506, in the state of Maharashtra, India which is spread over an aggregate parcel of land admeasuring about 2,000 sq. mts. (Manufacturing Facility) with an aggregate annual total installed capacity of 9,000 MT per annum. The company’s Manufacturing Facility employs modern machinery and equipment to ensure smooth flow of operations. It is holding certificate of good manufacturing practices (GMP) for manufacture and sale of bulk drugs / API and ISO 9001:2015 certification. Its quality control team monitors the manufacturing process at all stages from initial testing stage for incoming raw material to the final product prior to packing.

Proceed is being used for:

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

Industry Overview

The pharmaceutical API industry in India is ranked third-largest globally in terms of volume, behind China and Italy – About 35 per cent of API and intermediaries produced in India are exported and the remaining API and intermediaries are sold in the domestic market, including captive consumption by several large formulation players. India is the largest provider of generics drugs globally contributing to ~20% in global supply by volume of generics drugs. Bulk drugs are exported either under a contract manufacturing service between Indian manufacturers and global innovator companies or are merely supplied on a trading basis. The latter method is generally followed when exporting to semi-regulated markets or while supplying bulk drugs for manufacture of off-patent drugs in regulated markets. Typically, regulated markets offer higher profits than semi-regulated markets. Exports to regulated markets also occur in the nature of contract manufacturing for on-patent and off-patent drugs. Besides, bulk drugs are also supplied (in smaller quantities) during drug development to innovator companies. Players operating in this segment earn higher margins as compared to other exporters. The margins vary according to the player's area of expertise; for example, custom synthesis carries very high margins compared to supply for manufacture of off-patent drugs.

In terms of imports, Indian API industry still relies on imports for specific products. High dependence on Chinese imports is a concern for the domestic pharmaceuticals industry. The covid outbreak has been detrimental in revealing the consequences of a supply disruption from China and its potential impact. Therefore, the central government has earmarked Rs 100 billion for the bulk drug industry, including Rs 30 billion for promotion of bulk drug parks (for next five years) and Rs 69.4 billion towards production linked incentive scheme for promotion of domestic manufacturing of critical KSMs/Drug Intermediates and APIs in the country (for next eight years). The overall API industry in India grew from Rs. 781 billion in fiscal 2017 to Rs. 1179 billion in fiscal 2022 registering a CAGR of 8.5% in rupee terms. Growth in the industry was supported by growth in formulation manufacturing in India. The formulation industry also grew at healthy pace during the same period and API imports grew at a tepid pace during the period under consideration. Thus, the domestic API and intermediaries industry was supported by demand in formulation, manufacturing by local players and backward integration by large formulation players. Going forward the API industry is expected to clock a CAGR of 9-11% between fiscal 2022 and fiscal 2027, largely driven by growth in API exports, which is expected to deliver a healthy growth during the period under consideration.

Pros and strengths

Experienced promoters and strong management team: Shantilal Shivji Vora, Promoter and Non-Executive Director of the Company and a first-generation entrepreneur has been associated with the Company (including as partner of Bharat Chemicals) since 1998. He has a rich experience of over 45 years in chemical and pharmaceutical industry. The company has grown rapidly over the last few years primarily due to the vision, commitment and dynamism demonstrated by its promoter Shantilal Shivji Vora and he continues to be the driving force for the Company. Santosh Shantilal Vora, Promoter and Managing Director of the Company and has been associated with the Company for the past 7 years (including as partner of M/s. Bharat Chemicals) and is a second generation entrepreneur with a sharp business acumen and passion to achieve great milestones. Its board of directors comprise of a combination of industry specialists, management executives and independent members who bring significant value, maturity and their experience in the company.

Strong financial performance: The company strives to maintain a strong financial position with emphasis on having a strong balance sheet and increased profitability. For the Fiscal 2023, Fiscal 2022 and Fiscal 2021, its revenue from operations were Rs 3,339.10 million, Rs 2,915.23 million and Rs 1,823.69 million, respectively. Its revenue from operations grew at a CAGR of 23.90% between Fiscal 2017 and Fiscal 2023. For the Fiscal 2023, Fiscal 2022 and Fiscal 2021, its restated profit after tax was Rs 289.98 million, Rs 274.96 million and Rs 305.93 million, respectively. Its restated profit after tax, grew at a CAGR of 26.81% between Fiscal 2017 and Fiscal 2023. Its balance sheet strength, high ROCE, positive operating cash flows, shorter debtor holding period, enable it to fund its strategic initiatives, pursue opportunities for growth and better manage unanticipated cash flow variations.

Reducing dependence on import of raw materials: The company imports Para Amino Phenol, being raw material for manufacture of Paracetamol from China and Cambodia. The company’s decreasing trend of import of said raw material and purchasing the same through its promoter group company i.e. Valiant Organics which leads to better coordination, competitive pricing, eliminating hefty transportation and reduced delivery transit time.

Strategically located Manufacturing Facility: The company’s Manufacturing Facility is strategically located at a distance of about 150 Kms. from JNPT (Nhava Sheva) Port, Navi Mumbai, Maharashtra and approximately 110 kms from its registered office at Mulund West, Mumbai, Maharashtra, which ensures that it has ready access to port facilities and are able expediently import its raw materials and export its products thereby providing it with a cost and logistical advantage. Further, its Proposed Facility will be located close to the southern and western regions of India, where some of the major pharmaceutical manufacturers are located.

Risks and concerns

Single product manufacturing company: The company develops, manufacture and market API/ bulk drug product (i.e. paracetamol) which is primarily used as raw material by its customers for a variety of end user products. The company is dependent on production and sales from single product (i.e. paracetamol) for its operating income. Since it is a single product manufacturing company i.e. paracetamol, increase in demand of alternative products to paracetamol such as ibuprofen and diclofenac sodium may result in a decrease in demand of its product which in turn will adversely affect its business, profitability and revenue from operations. In the event, there is any decline in demand or if its product becomes obsolete, or new substitute product is developed, the same would result in negative impact on its financial performance. Further, any change in the regulatory framework in which it operate, change in competitive landscape or non-availability of raw materials at competitive pricing could impact its operations and profitability. Furthermore, if the company’s customers’ products cause, or are perceived to cause, severe side effects to the end-users, it may face a number of consequences, including, a severe decrease in the demand for and sales of its product; withdrawal or cancellation of regulatory approvals for production of paracetamol.

Subject to strict quality requirements, regular inspections and audits by customers: The company develops, manufacture and market Active Pharmaceutical Ingredient (API), namely, Paracetamol. It operates in a regulated industry, both in relation to its operations as well as the operations of its customers. Its customers maintain strict qualification and/or certification procedures. Its products go through various quality checks internally at various stages including random sampling checks. Many of its key customers have audited and approved its facilities and manufacturing processes in the past and may undertake similar audits periodically in the future. The success of such audits plays a critical role in customer retention, and any issues that arise in the course of these audit may lead to loss of the particular customer and also impact relationship with existing customers. Further, if the company is unable to comply with the requirements of its customers, it may face loss of business from such customers. 

Limited number of suppliers for raw materials: The company depends on external suppliers for all the raw materials required and typically purchase raw materials on a purchase order basis and place such orders with them in advance based on its projected requirements. As a result, the success of its business is significantly dependent on maintaining good relationships with its raw material suppliers. The absence of long-term supply contracts subjects it to risks such as price volatility caused by various factors viz. market fluctuations, currency fluctuations, climatic and environmental conditions, transportation cost, changes in domestic as well as international government policies, regulatory changes and trade sanctions. Some part of its raw materials and consumables are also imported. Cambodia and China constitute the countries from which the raw materials were imported during the last three financial years. For Fiscal 2023, Fiscal 2022 and Fiscal 2021, its purchase of imported raw materials amounts to Rs 325.51 million, Rs 761.13 million and Rs 920.45 million, representing 11.71%, 31.17% and 74.86%, respectively, of its total raw material purchase. As a result, it continue to remain susceptible to the risks arising out of foreign exchange rate fluctuations as well as import duties, which could result in a decline in its operating margins.

Face competition: The pharmaceutical industry is a highly competitive market with several major pharmaceutical companies present, and therefore it is challenging to improve market share and profitability. In addition, the major pharmaceutical companies may set up pure play API businesses similar to its, which may impact its market share and profit margins on its products. Although the pharmaceutical industry provides for significant entry barriers, competition in its business is based on pricing, relationships with customers, research and development, product registration, product quality, customisation, and innovation. It may have to compete with new players in India and overseas who enter the market and are able to offer its products at competitive rates. Many of its competitors may have access to greater financial, manufacturing, R&D, marketing and other resources, more experience in obtaining regulatory approvals, greater geographic reach, broader product ranges or a stronger sales force. Increasing competition may result in pricing pressures and decreasing profit margins or loss of market share or failure to improve its market position, any of which could substantially harm its business and results of operations. For instance, it faces pricing pressures from companies, principally in China, that are able to produce chemicals at competitive costs and consequently, may supply their products at cheaper prices. It cannot assure that it will be able to compete with its existing as well as future competitors as well as the price and services offered by them. 

Outlook

Valiant Laboratories is a leading Active Pharmaceutical ingredient manufacturing company with its focus on manufacturing Paracetamol API/Bulk Drug which has several applications like uses in treatment of conditions such as headache, muscle ache, arthritis, back ache, toothache, cold and fever. It operates a single location manufacturing facility at Tarapur industrial estate. The company’s facility is well equipped with latest instruments and equipment’s to meet the requirements of its customers and it also offers different grades of the API as per the requirement of the customer. Its manufacturing facility is strategically located at a distance of 150 Km from Nhava Sheva Port (JNPT) and approximately 110 Km from its registered office in Mumbai. The company also has a dedicated team for carrying out various research and development projects to identify newer molecules that company can commercialise and further add to its growth. On the concern side, the company is subject to operating risks associated with handling of such hazardous materials such as possibility for leakages and ruptures from containers, explosions, and the discharge or release of toxic or hazardous substances, which in turn may cause personal injury, property damage and environmental contamination.

The issue has been offered in a price band of Rs 133-140 per equity share. The aggregate size of the offer is Rs 144.83 crore to Rs 152.46 crore based on lower and upper price band respectively. On the financial front, the company’s total revenue increased by Rs 453.01 million, or by 15.44%, from Rs 2934.72 million in the Fiscal 2022, to Rs 3387.72 million in the Fiscal 2023. This was primarily due to an increase in its revenue from operations, and aided by increase in other income as well. The company recorded an increase in its profit by Rs 15.02 million or by 5.46% from Rs 274.96 million in Fiscal 2022 to Rs 289.98 million in Fiscal 2023. Meanwhile, the company, through its wholly owned subsidiary Valiant Advanced Sciences, intend to establish a greenfield project at Saykha Industrial Area, Bharuch, Gujarat, which shall be spread over an aggregate parcel of land admeasuring about 57,766 sq. mts (Proposed Facility) which shall venture into the speciality chemicals industry by manufacturing ketene and diketene derivative products. In order to improve the company’s operational efficiencies, it intends to implement backward integration measures by manufacturing ketene and diketene derivative products.