Despite the muted response to Vijaya Diagnostics IPO, the broader boom is likely to continue on the back of improved financials and the potential of the ‘China plus one’ strategy.
The Covid-19 pandemic created a sea of opportunities for the healthcare sector. Several pharma and specialty chemical companies launched their initial public offerings (IPOs), hastened by the disruptions brought about by the pandemic. The frenzy of IPOs shows no sign of slowing down. At least not immediately.
On Friday itself, two such firms in the space- Vijaya Diagnostic Centre and Ami Organics- are set to close their listings. Bain Capital-backed Emcure Pharmaceuticals, whose unit is developing India's first indigenous mRNA COVID-19 vaccine, is waiting closely on their heels, having already filed its draft red herring prospectus to raise about Rs 4,500 crore. Overall, riding on bullish investor interest in the healthcare sector, several pharma companies are tapping the IPO market and looking to raise a whopping Rs 8,000 crore!
While the broader boom in IPO listings amid a flush of liquidity and spiking retail investor interest in the country is helping the pharma space, there are certain industry-specific factors driving this boom as well.
First, the huge jump in demand for drugs, diagnostic services and other medical infrastructure during the pandemic have greatly improved the financials of pharma companies in the last fiscal year, says Sneha Poddar, AVP, Research, Broking & Distribution at Motilal Oswal. “Everyone wants to take advantage of the booming market and come out with a listing at a time their financials are improving.”
Secondly, the huge supply chain disruptions faced during the pandemic has made several multinational firms wary of dependency on China, especially in the pharma space, leading them to pivot towards a “China plus one” strategy.
“Companies realized the kind of supply chain disruption they faced and have started investing in new manufacturing plants in different locations”, Poddar points out. As a result, companies are looking towards other low-cost manufacturing spots, such as India and Vietnam. In India, government PLI (production-linked incentives) schemes are also boosting the case for domestic manufacturing, and pharma and specialty chemical companies are set to take advantage of that.
Analysts also see an inflection point in the global market for generic drugs, where India is already a major supplier. “Lots of products will be going off-patent over the next 4-5 years. India would stand to benefit from this, and the companies know it”, Poddar explains.
NEED TO STAND OUT
However, the crowded IPO space in the pharma sector has meant that the fortunes have been varied. While there have been some blockbuster listings such as Tatva Chintan, Clean Science and Technlogy and Krsnaa Diagnostics, others have witnessed lukewarm response from the investors.
Parvati Rai, head of research at K R Choksey points out that the last few listings in the market have been tepid. With so many options at the table, investors are looking for names which stand out.
“While Tatva Chintan saw a decent premium listing, some of the recent ones haven’t seen the same. The market is flushed with liquidity, some profit booking has started. Companies which are undertaking IPOs purely for listing gains are struggling from a longer-term sustenance perspective”.
Motilal’s Poddar adds that what investors are looking at is niche businesses, and smaller pharma companies who have niche product portfolios are grabbing more eyes. Pune-based specialty chemicals manufacturer Clean Science and Technology, which made its stock market debut in mid-July and has appreciated over 75 per cent from its issue price, is one such example.
On the other hand, the IPO of Vijaya Diagnostic Centre, one of the largest integrated diagnostic chains in South India, has so far received muted response from investors. It was subscribed 47 percent on September 2, the second day of bidding, and the public issue has received bids for 1.18 crore equity shares against offer size of 2.50 crore equity shares.
“The company’s business model is good, but the space is already very crowded, with many listed players already present”, Poddar points out.
Rai, on the other hand, says that the issue price was slightly expensive, and the company also did not clearly indicate how they are going to use the proceeds from the listing. “While cashing on the boom by the promoters is a key driver of listings, clarity on where the funds will be utilised is important.”
“When you look at Tatva Chintan or Krsnaa Diagnostics, they clearly mentioned that the proceeds are being used for capacity expansion”, she adds.
However, despite the blips, the boom is unlikely to subside anytime soon, analysts believe.
"I think the boom will continue. Some few good names have already filed for draft prospectuses. Moreover, the ‘China plus one’ strategy holds a lot of potential”, Rai says.