Ashok Kumar, theIPOguru, is a man of few words. So, when he speaks, investors and particularly those chasing the IPO Rainbow with
the proverbial 'pot of gold' at the end of it, listen carefully.
Issue Price:Rs. 75 - Rs 85 Issue Size: Rs 2,000 million Issue Opens-Closes:14th – 17th June 2010 Listing: BSE and NSE Market Cap: Rs.4,642 million to Rs 4,994 million EPS (Annualized FY11 E): Rs. 5.5 P/E Ratio (x): 14 - 15 times
Parabolic Drugs Limited (PDL) is a Chandigarh-based contract manufacturer of active pharmaceutical ingredients (API) and API intermediates (oral and sterile range of cephalosporin APIs and intermediates). It currently currently owns and operates two manufacturing facilities at Derabassi, Punjab, and Panchkula, Haryana.
The company’s product portfolio comprises 44 APIs and seven API intermediates and it supplies its products to approximately 45 countries, including regulated markets. It has also filed 17 dossiers as part of its strategy to increase penetration in the regulated markets.
To increase it presence in the therapeutic segments and contract research and manufacturing (CRAMS) it has proposed to set up another manufacturing facility at Chachrauli, Derabassi, to manufacture the non-antibiotic range of APIs. The plant is expected to commence commercial operations in fiscal 2012.
The company plans to raise Rs 2,000 million from the issue proceeds that includes an offer for sale of 20,25,702 equity shares by private equity investors (BTS India Private Equity Fund Ltd and Alden Global (Mauritius) Ltd).
The proceeds have been earmarked for setting up a multi-purpose block III ( Rs 203 million), Rs 326 million for sterile cephalosporin plant at Derabassi and Rs 160 million for a new plant at Chachrauli. It has also proposed to invest over one-fourth of the net proceeds (Rs 466 million) in its subsidiary – Parabolic Research Labs and Rs 388 million will be utilized towards repayment/prepayment of loan facilities.
Key Points:
The company manufactures a wide range of products in the antibiotic segment. Further, its strategy to leverage its R&D capabilities and further strengthen its presence in the CRAMs segment will help PDL to increase penetration in the regulated markets. However for now, it derives its entire revenues from APIs.
As on 31st December 2009, the company had a total debt (secured and unsecured) of Rs. 3,677 million. The Debt to Equity ratio thus stood at 3.3 times which remains high. The interest cost (Rs 296 million) thus forms more than 50 per cent of the profit before tax during the period under review. Though post equity dilution and part payment of debt (Rs 388 million), the leverage is likely to reduce, though it would still be on the higher side.
The consistent negative cash-flows from operations since FY 2005 especially on account of high working capital requirement is a cause of. For the period ended December 31, 2009, cash flows from operations after adjusting the working capital changes was negative (Rs 94 million), even if was a considerable improvement from the previous fiscal ( negative Rs 404 million).
This also indicates (to an extent) that company’s operations are highly raw-material intensive. For instance, raw-material costs account for more than 70% of sales. Moreover, more than 51 per cent of the same is imported and almost 26 per cent of the total raw-material demand is met from China. This also exposes the company to currency related risk to an extent.
As per the RHP, the benefits of the expansion plan would accrue only post FY 2011 as the plants are likely to be commissioned in Fiscal 2012. Moreover, part of the proceeds has been proposed to be invested in the subsidiary of the company that is yet to commence operations. Overall, there is a high risk of execution attached to the expansion plans proposed by the company.
Lastly, the pharma industry is highly regulated and the CRAMs segment in which the company has proposed to expand and leverage its existing capabilities is now very competitive with a fair number of proven players.
Though pharma stocks have performed well during the current fiscal, the sector remains a defensive bet.
On the pricing front, it appears steeply priced when benchmarked against smaller player like Aarti Drugs and major players like Aurobindo Pharma which have a similar product profile but trade a forward PE of multiple of less than 8 times. PDL on the other hand is demanding a PE of almost 14-15 times its FY 11 earnings.
Clearly then, proven listed peers appear a safer bet.
