Alkem Labs IPO – Should you subscribe?

Alkem Labs IPO Review - Should you subscribeAlkem Labs IPO – Should you subscribe?


Mumbai based, Alkem Labs IPO would open for subscription on 8th December, 2015. Alkem Labs is leading pharmaceutical company in India. Its revenues grown by 2.2 times in last 5 years. It earned profits 11.7% in the last financial year. It is growing at 22% CAGR in last 5 years. What are positive factors of Alkem Labs Ltd IPO? What are the hidden factors in Alkem Labs IPO? Should you invest in such IPO or not? Let me review this IPO with all factors.

About Alkem Labs Limited


Company is a leading Indian pharmaceutical company with global operations, engaged in the development, manufacture and sale of pharmaceutical and neutraceutical products. For fiscal year 2015, they are the fifth largest pharmaceutical company in India in terms of domestic sales (Source: IMS SSA MAT March 2015). Further, they had the largest number of brands (five) in the top 50 brands of the Indian pharmaceutical industry for fiscal year 2015 in terms of domestic sales (along with another leading pharmaceutical company) (Source: IMS SSA MAT March 2015) and the second largest number of brands (five) in the top 50 brands of the Indian pharmaceutical industry for the six months ended September 30, 2015 in terms of domestic sales (along with another leading pharmaceutical company) (Source: IMS SSA MAT September 2015)

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Issue details of Alkem Labs IPO


  • IPO opens: 8-Dec-2015
  • IPO closes: 10-Dec-2015
  • Face Value: Rs 2 per share
  • Issue price band: Rs 1,020 to Rs 1,050 per share
  • Minimum Shares: 14 shares and multiples of 14 shares there-of
  • Minimum amount: Rs 14,280
  • Issue size: Minimum of Rs 1,300 Crores
  • Lead Managers: Axis Capital, Edeweiss Fin  services, JP Morgan and Nomula Financial Advisors.
  • Listing: BSE and NSE
  • Download Alkem Labs Limited IPO Prospectus from this link

Purpose of the IPO


  • To achieve listing benefits
  • Offer for sale of 12.85 Crore equity shares by selling shareholders.
  • Company would not get any proceeds from this issue.

Company Financials (consolidated and reinstated)


  • Company generated revenue of Rs 1,804.21 Crores for the year ended Mar-11 and Rs 3,969.74 Crores for the year ended Mar-15.  For 6 months ended Sep-15, company generated revenue of Rs 2,659 Crores.
  • Company posted a profit of Rs 295.58 Crores for the year ended Mar-11 and a Profit of Rs 462.56 Crores for the year ended Mar-2015. For 6 months ended Sep-15, company generated profits of Rs 431.29 Crores.
  • Its EPS for FY 2015 is Rs 36.8 and last 3 years average EPS of Rs 38.7.

Alkem Labs IPO - Company financials

Reasons to invest Alkem Labs IPO


  • Good revenue growth in last 5 years. Its revenues increased by 22% CAGR in last 5 years.
  • It earned good profits of 11.7% in FY15 and 16.2% for 6 months ended Sep-15.
  • Good business prospects.

Reasons not to invest in Alkem Labs IPO


  • There are outstanding litigations involving Company, its Promoters, its Directors and its Subsidiaries.
  • Company business is subject to extensive regulation. If they fail to comply with the applicable regulations prescribed by governments and regulatory agencies, its business, results of operations and financial condition could be adversely affected.
  • The regulatory uncertainty associated with pharmaceutical pricing, reimbursement and related matters could adversely affect the marketing, pricing and demand for its products.
  • Company top 20 brands account for a majority of its domestic sales. Additionally, certain therapeutic areas and certain states generate a significant portion of its total domestic revenue. Company business, prospects, results of operations and financial condition may be adversely affected if any of its top 20 brands or its other products in its key therapeutic or geographic areas do not perform as expected or if competing products become available and gain wider market acceptance.
  • Company is susceptible to product liability claims that may not be covered by insurance which may require substantial expenditure and may adversely affect its reputation and if successful, could require company to pay substantial sums.
  • If there is a change in policies related to tax, duties or other such levies applicable to it, it may affect its results of operations.
  • Any manufacturing or quality control problems may damage company reputation for high quality products and expose it to litigation or other liabilities, which could adversely affect its financial results.
  • Any delay in production at, or shutdown of, any of its manufacturing facilities or at any of the third party manufacturing facilities they use, could adversely affect its business, results o f operations and financial condition.
  • Other risk factors (Internal and external) can be viewed in prospectus Page no. 18 onwards.

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Recommendation / Investment strategy


  • At an upper price band of Rs 1,050 and EPS of FY2015 of Rs 36.8, P/E Ratio works out to be 28.5x.  For last 3 years average EPS of Rs 38.7, P/E ratio works out to be 27.1x. Means, company is asking the higher price band in the range of 27.1x to 28.5x P/E ratio. There are listed peers like Alembic Pharmaceuticals whose P/E Ratio is 45.2 and Torrent Pharma whose P/E ratio is 34.8, hence we can say the upper price band of this IPO issue is reasonably priced.
  • Alkem Labs Limited revenues are showing good growth in last 5 years. It generated competitive margins of over 11.7% in last financial year. One should consider various positive and negative factors indicated above. Personally, I would feel this is good investment bet and recommend investors to subscribe to this IPO.

Disclaimer: I do not have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy. Please consult your investment advisor before you invest in such high risk investment options.

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Suresh
Alkem Labs IPO – Should you subscribe

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