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KARACHI: Several brokerage houses have issued ‘subscribe’ calls for the upcoming initial public offer (IPO) of Citi Pharma, a major manufacturer of paracetamol.

The drug-maker is looking to raise up to Rs2.8 billion by offering a 35 percent stake to institutional and ordinary investors in the IPO whose first leg, known as the book-building process, will commence on June 15.

“The Pharma sector is currently trading at a price-to-earnings (P/E) multiple of 16.7… applying it to Citi Pharma’s next two-year average earnings of Rs3.80 per share, our fair value estimate stands at Rs60.80 per share,” said AKD Securities in a recent note issued to its clients.

Keeping in view the possible delays in gaining market penetration and normalisation in demand post-Covid-19, the brokerage house incorporated a 35 percent discount to the fair value, which resulted in a fair price of Rs39.5 per share. “Given a 15 percent required return, the indicative subscribe price comes at Rs34.40 per share,” it said while recommending its clients to subscribe to the offer at this level.

It should be noted that the book-building exercise will be carried out at the floor price of Rs28 per share. But the strike price can go up by 40 percent (Rs39.20 a share) based on the response from potential investors. The biggest chunk of Citi Pharma’s revenue comes from the manufacturing of active pharmaceutical ingredients (APIs), which are key substances that make a finished pharmaceutical product. GlaxoSmithKline, The Searle Company, Barret Hodgson and Martin Dow buy their APIs from Citi Pharma.

While recommending the stock, AKD Securities noted that Citi Pharma’s revenue has registered a four-year compound annual growth rate (CAGR) of 28 per cent. The company management expects the forward three-year CAGR of 54 percent through the capacity expansion that it will achieve using IPO proceeds, the brokerage house noted.

Dawood Equities Limited in its report said that given the attractiveness of multiple catalysts at play we suggest a bidding price of Rs39.2 per share, up 40 percent to the floor price of Rs28 per share. According to Darson Securities, the production cost is relatively lower for local pharmaceutical manufacturers, which will increase demand for the company’s products in the future. Being one of the leading API manufacturers, expansion in the formulation segment creates natural synergies for Citi Pharma, it said.

“We recommend our investors to subscribe to the Citi Pharma IPO with a price up to Rs36 per share. Our June 2022 target price comes out at around Rs42 per share based on blended valuation. The stock is offering at 2021-22 (estimated) P/E of 10.8,” it said.

As per the financial accounts for the latest nine-month period through March, Citi Pharma recorded revenue of over Rs4 billion, translating into a gross margin of 15 percent, due to better prices and higher volumes. The company posted a net profit of Rs252 million. Successful bidders will be provisionally allotted 75 percent of the issue size (54.5 million shares) following the book building process. The remaining 25 percent (18.1 million shares) will then be offered to retail investors at the strike price.

Copyright Business Recorder, 2021