Introduction

Pharmeasy, a significant player in India's digital pharmacy landscape, has recently announced its plan to raise INR 3500 Cr through a Right Issue of Compulsorily Convertible Preference Shares (CCPS) B. This move has stirred interest and curiosity among investors and industry experts alike. This blog aims to dissect the nuances of this financial action, its impact on the company's valuation, and what it means for potential and current investors.

Why is Pharmeasy Raising Capital?

The primary reason behind raising this massive amount is to pay back a loan that Pharmeasy took from Goldman Sachs. According to the original loan agreement, Pharmeasy was supposed to raise future capital through equity. However, Goldman Sachs extended this deadline to July 2023, providing the company with the flexibility to opt for issuing CCPS B.

Investor Commitment: A Confidence Booster

MEMG International India Private Limited, which is wholly owned by Dr. Ranjan Pai and his family, along with other co-investors, have already committed around INR 1300 Cr. Such a significant commitment not only instills confidence among other investors but also underlines the robust financial planning behind this Right Issue.

The Nature of CCPS B

These are not regular equity shares. They are Compulsorily Convertible Preference Shares (CCPS B), and they are being issued at INR 96.8 per share. Eligibility for this issue is open to holders of API Holdings’ equity shares, CCPS A, or ESOPS as of August 11, 2023.

The Conversion Game: Decoding the Price

The market was abuzz with rumors suggesting a Right Issue price of INR 4.84 per share. However, the actual price stands at INR 96.8. Now, the catch here is that these CCPS B can be converted into 20 equity shares at a future date. So, in essence, the effective price becomes INR 4.84, aligning with the market whispers.

Subscription Ratio

For every 17 equity shares you hold, you will be entitled to receive 1 CCPS B. These shares offer considerable flexibility, as they can be converted into equity shares whenever the investor chooses to do so.

Past Context: CCPS A Conversion

For investors who participated in last year’s Right Issue involving CCPS A, the conversion price has been fixed at INR 4.356 per CCPS A, following a Board meeting held on July 24, 2023.

Valuation Post Right Issue

Now, let's dive deep into the valuation metrics. Currently, the company holds:

a) Equity Shares: 614 Cr

b) CCPS A: 5.48 Cr

c) CCPS B: 36.1 Cr ( After Successful Right Issue )

If we assume that all these shares are converted into equity, we'll have a total of 1456 Cr shares (614 Cr from existing equity shares, 120 Cr from CCPS A, and 722 Cr from CCPS B). With an assumed share price of INR 5, the valuation will be approximately INR 7280 Cr or close to 1 Billion USD.

Timelines and Objectives

The Right Issue is scheduled to be open from September 29, 2023, to October 27, 2023. The funds raised through this Right Issue will be utilized for debt repayment, fulfilling working capital needs, and maintaining specific cash reserves, as mandated by the agreements with debtors.

Conclusion: A Strategic Lifeline and Bright Prospects Ahead

The Right Issue of CCPS B provides Pharmeasy with a significant capital infusion, offering the company a new lifeline for growth and innovation. Additionally, this capital raise will extinguish the debt obligations to Goldman Sachs, further strengthening the company’s balance sheet. If you examine the financials for FY23, you'll notice a drastic reduction in losses—from approximately INR 4000 Cr in FY22 to around INR 2200 Cr in FY23. This improvement in the bottom line indicates effective cost management and possibly increasing revenue streams. Based on this trend, we believe that the company is well-positioned to perform strongly in the next two years.

Investment Dilemma: Unlisted Market Shares or Right Issue?

For those contemplating an investment in Pharmeasy, the quandary often boils down to whether to buy shares from the unlisted market or to apply in the Right Issue. Our analysis suggests that applying in the Right Issue would be more advantageous as it offers shares at a more attractive price point. This Right Issue, therefore, not only solidifies Pharmeasy's financial standing but also presents an enticing investment opportunity for those looking to capitalize on the company's future growth.