Eris Lifesciences - Rsec IPO Note - Proven Track Record & Strong Growth Potential

Eris Lifesciences Limited (Eris) – incorporated in January 2007 – develops, manufactures and commercialises branded pharmaceutical products within Chronic and Acute therapeutic segments i.e. Cardiovascular (CVS), Anti-diabetics, Vitamins, Gastroenterology, Anti-infectives and Gynaecology. Cash flow sticky Chronic segment contributed 65.6% to its revenues, while the Acute segment contributed the rest 34.4% in FY17.

Eris is promoted by Mr. Amit I. Bakshi, Mr. Himanshu J. Shah and Mr. Inderjeet Singh Negi having an average experience of more than a decade in pharmaceuticals industry. In FY17, Eric was ranked at 20th place out of 377 domestic and MNCs Chronic segment players of Indian pharmaceutical market in terms of revenues.

As of Mar’17, its product portfolio comprises of 80 mother brand groups with primary focus on niche therapies. Eris owns and operates a manufacturing facility in Guwahati (Assam) with capacity utilization of 30%. Assam plant contributes 85% to its revenue and outsourcing (~20 third party manufacturers) contributes the rest. As of Mar’17, the Company has 7 sales divisions with 1,501 marketing representatives.

Eris is coming out with an Initial Public Offering (IPO) with Offer for Sale (OFS) of 28.87mn equity shares of Rs1 each to raise up to Rs17.3-17.4bn. The Issue comprises of net offer to public up to 28.72mn equity shares with an Employee Reservation Portion of 15 lakh equity shares. Eris will not receive any proceeds from the Offer, as the proceeds will go to the selling shareholders, in proportion to the equity shares offered by the respective selling shareholders.

The Issue will open for subscription on Friday, June 16, 2017 and close on Tuesday, June 20, 2017. The price band of the Public Issue is fixed at Rs600 to Rs603 per share. At the upper end of the price band, Eris’ market capitalization works out at Rs82.91bn. The shares will be listed on BSE and NSE.

Outlook & Valuation

Eris has reported strong growth in sales (17% CAGR) and PAT (43% CAGR) with margin expansion of ~1,500bps to 37% over FY13-17. Further, RoE and RoCE ratios are very impressive at 45% and 38%, respectively. Looking ahead, we expect huge scope for margin improvement with increase in capacity utilization at Guwahati (Assam) plant from current level of 30%.

At the upper end of the IPO price band, the stock is valued at P/E ratio of 34x FY17 earnings of Rs17.6. Despite expensive valuation, we recommend SUBSCRIBE to the IPO as Eris is expected to be benefitted from imminent growth opportunity on account of secular growth in Indian pharma market led by favourable macro environment, high return ratios, and healthy earnings/EBITDA growth.