ICRA assigns IPO grade 4 to Arch Pharmalabs

ICRA has assigned an IPO grade 4, indicating above-average fundamentals, to the proposed initial public offering (IPO) of Arch Pharmalabs Limited (APL). ICRA assigns IPO grading on a scale of IPO Grade 5 to IPO Grade 1, with Grade 5 indicating strong fundamentals and Grade 1 indicating poor fundamentals.

Arch Pharmalabs Limited (APL) proposes to come out with an Initial Public Offer (IPO) aggregating to Rs. [*] crore, consisting of fresh issue of [*] equity shares by the company aggregating upto Rs. 135.0 crore and an offer for sale of 6,172,607 equity shares by private equity investors aggregating to Rs. [*] crore.

The grading takes into account APL's demonstrated ability to sustain healthy revenue growth in conjunction with stability in operating margins; strengthening presence in certain key bulk drugs segments. The grading also factors in the substantial scale up of the company's contract research and manufacturing services (CRAMS) business catering to a strong pipeline of novel drugs by leading innovator companies, thereby lending sustainability to future revenue growth and strengthening the company's client/ product diversification. APL's ability to attract and partner innovator companies has been aided by the company's technology tie-ups with Codexis Inc, DSM Anti Infectives and Orochem Technologies Inc., thereby providing a competitive edge to the company's CRAMS division.

APL's financial profile is characterised by high leverage on account of acquisitions and substantial capital expenditure undertaken in the past, funded through mix of debt and equity. Moreover, the company's high working capital intensity, largely characteristic of the bulk drug industry, has resulted in negative fund flow from operations. In an attempt to improve its stretched capital structure, the company has undertaken a series of fund raising initiatives, culminating with the proposed IPO. With these fund raising initiatives the company's capital structure is expected to improve. The grading also takes into account APL's improving profitability owing to greater contribution from the CRAMS business and introduction of niche APIs in therapeutic segments such as oncology. However, the RoCE is lower when compared to domestic pharmaceutical peers present in capital intensive nature of bulk drug manufacturing.

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