Windlas Biotech Limited.: (Avoid)

Windlas Biotech Limited is amongst the top five players in the domestic pharmaceutical formulations contract development and manufacturing organization (“CDMO”) industry in India in terms of revenue (Source: CRISIL Report). With over two decades of experience in manufacturing both solid and liquid pharmaceutical dosage forms and significant experience in providing specialized capabilities, including, high potency, controlled substances and low-solubility, the company provides a comprehensive range of CDMO services ranging from product discovery, product development, licensing and commercial manufacturing of generic products, including complex generics, in compliance with current Good Manufacturing Practices (“GMP”) with a focus on improved safety, efficacy and cost. 

In FY20, their market share was approximately 1.5% in terms of revenue in the domestic formulations CDMO industry (Source: CRISIL Report). In addition to providing services and products in the CDMO market, they also sell their own branded products in the trade generics and OTC markets as well as export generic products to several countries. The company has three distinct strategic business verticals (“SBVs”): (i) CDMO Services and Products; (ii) Domestic Trade Generics and over-the-counter (“OTC”) Brands; and (iii) Exports.

The company currently owns and operates four manufacturing facilities located at Dehradun in Uttarakhand. As of March 31, 2021, their manufacturing facilities had an aggregate installed operating capacity of 7,063.83 million tablets/ capsules, 54.46 million pouch/ sachet and 61.08 million liquid bottles. In addition, they have recently received a license to manufacture certain APIs at their Dehradun Plant – I, which will help the company with backward integration.

Investment Arguments

• Windlas Biotech is one of the top five formulations of CDMO in India. 
• It has an innovative portfolio of complex generic products supported by robust R&D capabilities 
• The Company has long-term relationships with Indian pharmaceutical companies 
• Its manufacturing facilities are efficient and quality compliant with significant entry barriers 
• The Company intends to capitalize on expansion opportunities by leveraging the leadership position in the CDMO industry

Valuation

At the upper end of the price band of Rs 460, the issue is quoting at PE of 64x its FY21 earnings based on fully diluted earnings. Thus, the issue seem to be aggressively priced. Accounting adjustments of gains/losses of joint ventures and impairment of Goodwill has resulted in a declining trend in net profit despite growth in topline according to the management. We recommend investor to ignore this issue.

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