Citi Pharma IPO

Dear Clients,

Citi Pharma Limited (CPL) is the leading API manufacturer in the country and has filed for an intention to raise PKR 2.04bn to undergo a tri-fold expansion in APIs, Formulation and Healthcare segments. We recommend investors to Subscribe at the floor price of PKR 28/sh with a projected valuation of PKR 34/sh, 21% higher than the floor price. CPL currently trades at a forward PE of 9.97x as opposed to the industry’s average of 17.88x, a discount of 44%.

Expansion in product portfolio: CPL, leading Active Pharmaceutical Ingredients (API) producer, intends to issue 72.69mn ordinary shares (35% of post-IPO paid up) at a floor price of PKR 28/sh to raise PKR 2.04bn through IPO. CPL is one of the few API manufacturers compliant with international standards. The principal purpose of the IPO is to undertake tri-fold expansion in APIs, Formulation and Healthcare segments.

API segment – new molecules in pipeline: In the wake of demand resurgence for Paracetamol owing to COVID19, this segment achieved a utilization level of 84% in 1HFY21. With robust demand ahead, the company plans to expand it to 6,000MT from 3,600MT. CPL is also adding three new APIs in its product line comprising i) Ascorbic acid, ii) Chloroquine Phosphate and iii) Hydroxyl Chloroquine Sulfate. As highlighted by the management, Ascorbic acid will be used to treat low levels of vitamin C while the latter two are primarily anti-Malarial drugs.

Formulation segment – growing in high margin product: The company is gradually increasing its exposure in high margin product (Formulation segment) that has increased to 7% in FY20 from 1% in FY18. To further achieve synergies, the company is launching new manufacturing facilities for Injectables, Dry Powder/Suspension and Capsules/Tablets that will be manufactured using inhouse APIs. As per the management, CPL would be able to achieve utilization level of 80% – 85% over the next 2-3 years amid government’s initiative of Health card (Sehat Sahulat Program).

Making its way in healthcare segment: Moving towards forward integration, CPL is aspiring to build a 50-bed state of the art healthcare facility in Lahore. The company acquired a 4-kanal plot worth PKR 264mn in the heart of Pakistan back in FY18 from internal cashflow generation and its CoD is expected by 1QFY23. CPL aims to establish OPD, General Operations and Diagnostic services as there is a shortage of quality healthcare facilities in Lahore. The company expects the hospital business to contribute PKR 3.0bn revenue by FY26.

Operates at a cost-plus model: Citi Pharma Limited operates at a cost-plus model and has been able to sustain gross margins of 13% over the last 5yrs. The management highlighted that unlike Formulation business, prices for APIs are not regulated by the government and all costs are pass-through. Cherry on top is that the industry enjoys duty protection from govt as semi-finished API attract custom duty of 5-25% that plays a major role in keeping the local industry competitive. Additionally, the government has facilitated the industry by exempting sales tax and additional sales tax on the import of chemical molecules used for manufacturing of APIs. The custom duty structure on import of chemicals range from 0% – 5%.

GLAXO remains the major customer: CPL’s topline has posted a 3yr CAGR of 30% during FY18-FY20 which translated into earnings growth of 20%. With a revenue contribution of 93% in FY20 from the API segment, the company has established a loyal customer base within Pharmaceutical industry (GLAXO, SEARL and AGP). GLAXO is one of the major customers contributing 52.5% to topline. Plans to add new clientele base and reduce share of GLAXO to 30% – 35% over the next few years will likely counter customer concentration risk.

Subscribe till PKR 34/sh: CPL is expected to post earnings growth of 33% during FY21-FY24 driven by expansions in existing and as well as new product line. With the increased focus on health sector and public awareness, we expect the company’s timely expansion to reap benefits. CPL currently trades at a forward PER of 9.97x as opposed to the industry’s avg of 17.88x, a discount of 44%. We recommend investors to Subscribe at the floor price of PKR 28/sh with a projected valuation of PKR 34/sh, 21% higher than the floor price.

Regards,
KASB Research