Understanding Business, Risks, Financials and Valuation of Mono Pharmacare SME IPO

A) Business Model of the Company

1. Main Business: This company is in the pharmaceutical industry. This means they deal with medicines and other similar products.
a) Two Roles:

(i) Creators: They design medicine recipes or compositions. They don’t make the medicines themselves; instead, they give these recipes to other companies (called contract manufacturers) to make. Once these medicines are made, the company sells them under their brand name, “DLS Export”.

(ii) Middlemen: Besides selling their own branded medicines, they also act as distributors. This means they help other pharmaceutical companies sell their products by getting them to stores and other sellers.

b) Scale of Business:

(i) They work with 168 different pharmaceutical companies.

(ii) They have connections with 3,036 customers/vendors. These could be small medicine shops or big medicine wholesalers.

c) Experience: The main leaders or promoters of this company have been in the medicine business for over 10 years. They have played a big role in growing the company and have lots of experience and fresh ideas.

d) Location: Right now, they are focused on doing business in the western part of a state in India called Gujarat, especially in a city named Ahmedabad. So, they don’t really sell or distribute in other states or regions.

B) Risk in the Company

a) They rely on third parties for manufacturing products of the Company. No manufacturing of its own. So, margins will always remain low in the business.

b) As on 31.03.2023, the total outstanding unsecured loan taken from promoter is ~15 Cr.

C) Financials of the Company

a) Revenue has grown from 28 Cr in Fy22 to 58 Cr in Fy23. Company has shown excellent growth in the last 3 years.

b) PAT has grown from 9 lac in Fy21 to 1.20 Cr in Fy23.

c) Last 3 years Avg. EBITDA and PAT Margins are 4.15% and 1.13%. That means this business is high volume and low margin.

d) The ROE for Fy22-23 is 8% which is low.  We need businesses with at least 15% ROE.

e) The ROCE for Fy22-23 is 10% which is very low. We need businesses generating ROCE greater than atleast WACC which is around 13-14% in India.

D) Valuation of the Company

Asking P/e based on issue price of INR 28 is 41x and Mcap of 50 Cr which looks on higher side.

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