IPO: Bluejet Healthcare

Bluejet Healthcare, a leading manufacturer of contrast media intermediates and artificial intensity sweeteners, has come out with its IPO (initial public offering). Here's an overview of its business, strengths, weaknesses, and growth prospects.

In a nutshell

• Quality : Its three-year average return on equity (ROE) and return on capital employed (ROCE) are 39.7 and 42.8 per cent, respectively. In FY23, its ROE and ROCE were 26.6 and 31.7 per cent, respectively.
  
• Growth : Its topline grew by 5.5 per cent and 37 per cent in FY23 and FY22, respectively, driven by higher contrast media intermediates exports.
  
• Valuation : The stock will be priced at a P/E and P/B of 34 and 8.3 times, respectively. There are no listed peers currently.
  
• Overview : It is posed to be a direct beneficiary as the diagnostics industry grows due to high expenditure on healthcare. Its sweeteners business should also benefit from consumers switch from normal sugar to lower-calorie alternatives. However, high working capital requirement and stringent regulatory environment calls for caution.

About Bluejet Healthcare

Bluejet Healthcare (incorporated in 1968) is a pharmaceutical contract development and manufacturing (CDMO) company. It primarily develops and manufactures contrast media intermediates used in CT scans, MRIs and ultrasounds. It also manufactures APIs and artificial sweeteners for pharmaceutical and oral care companies.

Strengths of Bluejet Healthcare

• Largest Indian exporter of contrast media intermediaries , accounting for 75 per cent of all exports (in terms of value) between 2020-2022.
  
• It operates in a niche category with high entry barriers, allowing it to maintain long-standing relationships with its clients.

Weaknesses of Bluejet Healthcare

• Revenue concentration : Its top 10 largest customers accounted for 84 per cent of FY23 revenue.
  
• It is a high working capital business. Consequently, the company's receivables have grown annually at 29 per cent since FY21. Additionally, receivables as a percentage of revenue has remained consistently high.
  
• Highly dependent on the European markets as they contribute around 78 per cent of the total revenue. This makes its topline highly vulnerable to adverse macroeconomic factors.

Risk report

Company and business

• Are Bluejet Healthcare's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. The company's profit before tax was Rs 243 crore in the 12 months ending June 2023.
• Will Bluejet Healthcare be able to scale up its business?
  Yes. It is presently expanding its manufacturing capacities as it expects higher demand in the cost intermediates segment. Targeting new markets in Asia, Africa, and South America should also help scale up.
• Does Bluejet Healthcare have recognisable brands with client stickiness?
  Yes. Its long-standing relationships with its clients exemplify its client stickiness.
• Does the company have a credible moat?
  Yes. It operates in a niche category with high entry barriers due to high quality standards and difficulty in procuring raw materials.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Promoters' stake will be 86 per cent post IPO.
• Do the top three managers have more than 15 years of combined leadership at Bluejet Healthcare?
  Yes. Akshay Bansarilal Arora (Executive Chairman) and Shiven Akshay Arora (Managing Director) have a combined leadership experience of more than 15 years in the company.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is Bluejet Healthcare free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. The company's three-year average ROE and ROCE are 39.6 and 42.9 per cent, respectively. In FY23, the company's ROE and ROCE were 26.6 and 31.9 per cent, respectively.
• Was the company's operating cash flow positive during the last three years?
  Yes. It has reported consistently positive cash flow from operations in the last three years.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company is net cash positive as of June 2023.
• Is Bluejet healthcare free from reliance on huge working capital for day-to-day affairs?
  No. It is a working capital intensive business; average receivables as a percentage of revenue stood at 32 per cent as of FY23.
• Can the company run its business without relying on external funding in the next three years?
  Yes. It has generated positive cash flow from operations in the past three years. Additionally, it has conducted capex primarily through internal accruals.
• Is Bluejet Healthcare free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of equity stood at 0.1 per cent (as of FY23).

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 3.6 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  The company will trade at a price-to-earnings ratio of 34 times. There are no listed peers currently.
• Is the stock's price-to-book value less than its peers' average level?
  The company will trade at a price-to-book ratio of 8.3 times. There are no listed peers currently.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

Suggested read: What to look for in a company before investing?