Thread by @leading_nowhere

Windlas Biotech DRHP - Boulevard of broken dreams for US PE fund 👇 (1/n)

Introduction: Windlas Biotech Limited (WBL) is a Contract Development and Manufacturing Organization (CDMO) for domestic pharmaceutical companies. This is 'hot' industry right now, so the IPO has been optimistically priced at 50X earnings with a price band of Rs 448-460. (2/n)

WBL has had average performance in the last 3 years, with around 10% EBIDTA margin on average . 2019 was a good year but earnings have been stagnant for last 3 years. Cash flows are actually decent, with good conversion and some annual addition into fixed assets. (3/n)

WBL counts an increasing number of top pharma companies as customers and claims to be top 5 player in domestic CDMO. However, it has significant unutilized capacity despite minimal capex in the last few years. Depends if you see this as a glass half full or half empty. (4/n)

I'm no expert in this space, so those better acquainted with the industry can opine more on the commercial prospects of WBL. Let's see what else we can dig out from the DRHP. The first thing that leaps out is related party transactions and some eyecatching disclosures. (5/n)

It turns out that Windlas promoters have significant business interests outside WBL. Windlas Healthcare Private Limited (WHPL), the other company in the group, was a subsidiary till FY19, when Cadila Healthcare bought 51% from WBL and invested around 155 crore. (6/n)

At the time, Cadila had high hopes on expanding in the US through WHPL's USFDA approved facility. But lo! That pack of cards came crashing down in less than 18 months. Cue March 2020, and USFDA issues a warning letter and import alert for WHPL (7/n)

The full letter is here:
fda.gov/inspections-co… (8/n)

Here are some snippets as reported from a pharma industry website. This is all in the FDA report, but better summarized on the industry website. (9/n)

Following this, in April 2020, Cadila sold its entire WHPL stake and booked a loss on the transaction. Cadila invested 155 crore and exited at 105 crore. In 2021, WBL amalgamated WHPL into itself and is now running its plant, named Dehradun Plant - 4. (10/n)

It is not clear whether WBL ever took remedial action to fix the issues highlighted by the US FDA, but it seems the entire plan for export sales has been canned with Cadila pulling out of the facility. (11/n)

In the background of all this is a PE fund, Tano India Private Equity Fund II, who owns 22% of WBL. As per the shareholder's agreement provided in the DRHP, if WBL can't provide an exit, promoters have to buyout Tano from their own pocket. (12/n)

Tano's investment is standard PE - 5 to 7 year period - a shareholder's agreement providing for ROFR, pre-emptive rights, anti-dilution rights, affirmative rights - the whole spectrum. Exit routes aren't disclosed, but likely to be qualified IPO as PE folks will know. (13/n)

This part is very interesting - Tano invested approximately 75 crore into WBL, and further acquired shares worth 7 crore later, in total 82 crores. But Windlas promoters don't seem to be want to left out of the party, because there is an 'upside' sharing agreement too! (14/n)

While terms for upside agreement are scant, essentially, if Tano makes specified IRR upon exit, it will share part of upside with Windlas promoters. Interestingly this agreement was made in Dec 18, right after Cadila invested into WHPL (boulevard of broken dreams LOL). (15/n)

However, in May 2021, a revised shareholder's agreement was entered into specifically for the IPO. Again, Tano will share profit from the IPO to the promoters. This is quite awesome for promoters, but why can't the specifics be disclosed? IPO pricing incentives matter! (16/n)

The price band is fixed at Rs 448-460/share. For Tano's 40 lakh shares, this comes to Rs 179 crore in OFS part of the IPO. Rough calculations - Tano made only 14-15% CAGR in the investment, which isn't great by PE standards. No doubt hampered by the USFDA fiasco. (17/n)

One would have thought Tano would walk away with these middling returns, but the 10 May 2021 agreement indicates the promoters will likely still be eyeing a chunk of change from OFS part of the IPO. Wonder if this will be disclosed in final offer documents filed with MCA? (18/n)

The image in previous tweet shows a fresh issue of shares worth 165 crore. Let's see what this cash is going into - 50 crore into expansion, 47 crore and 20 crore for repayment of borrowings. (19/n)

Details for the first line item - capacity expansion - shows that a chunk of funds will go to related parties and what seem like sole proprietorship firms. Further, some machinery will be second hand machinery. No particular inference here, make of it what you will. (20/n)

Something very interesting - and this is tangential - is the repayment of 20 crore borrowings. Bajaj Finance loans were obtained at less than 7%. Where are the banks! Very competitive rate of funding. I wonder how much interest margin BFL makes on this? (21/n)

An irksome aspect of this DRHP is the insistence - like many other companies - is that they specify no 'listed' peers to compare financial ratios. Why this insistence on restricting competitors to 'listed' companies? Didn't make sense, so let's head to ICDR regulations. (22/n)

The ICDR regulations contain Schedule VI to outline disclosure requirements for IPOs. In terms of the financial ratios to be computed in the section 'basis for issue price', the regulations do not restrict such comparison to 'listed' companies. (23/n)

How difficult is it to pay Rs 100 to extract the data from MCA and compute these ratios? Net worth and PE are hardly complex calculations. Amazingly, the next section on "Industry Overview", prepared almost entirely by CRISIL Research, has analyzed competitors financials! (24/n)

CRISIL's research makes it easy to see Windlas Biotech is not at the top as far as financial ratios are concerned. Why is this contextual info not put in the basis for issue price where investors can find it easily? (25/n)

This customary practice being followed in many IPOs otherwise implying they are the creme de la creme of their industry. With more and more established businesses using IPOs as an exit route instead of growth capital, SEBI should enforce peer comparison more strictly. (26/n)

Anyway, that wraps up these set of observations. As always, none of this is a recommendation to invest or otherwise. Hope you learnt something and do RT the first post in that case. (27/n)

PS - Sorry, had to repost the thread. Missed a tweet at the start that made it seem quite abrupt. (28/n)