Anu (Avoid)

Review By Chittorgarh.com Team on May 11, 2008

  • BID/ISSUE Opens On: MONDAY, MAY 12, 2008
  • BID/ISSUE Closes On: THURSDAY, MAY 15, 2008
  • Price Band - Upper Band: Rs 210
  • Price Band - Lower Band: Rs 200
  • Face Value: Rs 10 per equity share
  • Issue Size: 3,820,000 Equity Shares
  • Issue Size in at Upper Band: Rs 80.22 Cr.
  • Issue Size in at lower band: Rs 76.40 Cr.
  • Issue as % of post issue share capital: 27.14 
  • Equity Shares outstanding prior to the Issue: 8,256,000 Equity Shares
  • Equity Shares outstanding post the issue: 12,076,000 Equity Shares
  • Listing on: BSE
  • Market Capitalization at upper band: Rs 253.60 Cr.

Issue objects

  1. Setting up a new plant for manufacturing of drug intermediates including Active Pharmaceutical Ingredients (APIs) at Vishakhapatnam.
    To expand its activities by way of forward integration, Anu proposes to set up a new plant for the manufacture of intermediates including APIs.

    Fund Requirement (Rs Cr.) - 55.09
  2. Setting up of pilot plant for carrying out Contract Research and Manufacturing (CRAM) at Vishakhapatnam.
    Anu's has identified contract manufacturing as one of the ways to maintain growth and profitability. Anu's currently contract-manufactures Ciprofloxacin Hcl for Dr. Reddy's Laboratories Limited. Anu's is of the view that there is large scope for extending such services to other companies both in India and abroad. It therefore intends to upgrade its manufacturing facilities so as to make them compliant with the norms laid down by international regulatory authorities like the United States Food and Drug Administration (USFDA). To offer contract research sevices, Anu's is planning to set up a pilot plant for carrying out CRAM at Jawaharlal Nehru Pharma City, Visakhapatnam. 

    Fund Requirement (Rs Cr.) - 8.34
  3. Meeting long term working capital requirement.

    Fund Requirement (Rs Cr.) - 16.67
  • Anu Laboratory was incorporated in the year 1996 for manufacture of Bulk Active Pharma Ingredients and Intermediates for drug molecules.
  • Group Companies
    Anu's Laboratories Limited has three Group companies: Nitya Laboratories Limited (NLL), Zen Chemi Consultech Private Limited (ZCPL), and Zen  Absorptions Private Limited (ZAPL). NLL is a contract manufacturer for Anu's, while ZCPL and ZAPL are unrelated to Anu's.  All the three Group companies have incurred losses during the last three financial years.

Company Business

  1. The company started its own manufacturing facilities in the year 1998 from Chilakamarri Village, Shadnagar, Mahboobnagar, District, Andhra Pradesh with manufacturing of 2,4 Dichloro 5 Fluoro Acetophenone (DCFA).
  2. Further with a view to add more products in its product profile Anu entered into contracts in 2004 with Nitya Laboratories Limited for conversion jobs for manufacture of Sodium Methoxide and CIS (+) Hydroxide Lactam.
  3. The Products of Anu's can be divided in three categories
    a) Basic Intermediates
    b) Advanced Intermediates
    c) Fine Chemicals
    Anu's supplies these to various drug manufacturers.
  4. Anu's had started export of its products in the year 2002 to Israel followed by exports to other countries like Italy, Japan, France, USA and Singapore. Currently, exports comprise of 19.97% of its total turnover.
  5. The Company has a team of 25 chemists who are engaged in research and development.
  6. Anu Labs product list:
Product Markets Type of
Intermediate
% Sales
YM07
% Sales
9D07
Applications
DCFA Domestic Basic 39.88 28.81 It is the starting intermediate for Ciprofloxacin which is a broad spectrum antibiotic.
Methyl-4 a Domestic Advanced 18.3 24.54 It is used as an intermediate in the manufacture of Fexofenadine an anti allergic drug.
Chlorohexanone Domestic &
International
Advanced 5.39 8.95 It's a key intermediate in the manufacture of Pentoxyfiline which is a cardio vascular medicine.
CIS (+) Hydroxy
Lactam
Domestic &
International
Advanced 21.01 24.27 It's an advanced intermediate used in the manufacture of Diltiazem which is a cardio vascular drug.
Sodium
Methoxide(SMO)
Domestic &
International
Fine Chemical 11.21 9.73 It is used as a catalyst in making of chemicals and Bio Fuels.

 

Financial Statements Data          
(Rs Cr) 9D07 YM07 YM06 YOY YM05
Total Income 113.82 121.29 95.33 27.23 67.22
Net Profit 13.12 13.59 5.57 143.99 1.94
Net Profit Margin 11.53 11.20 5.84   2.89
Net Worth 44.95 31.51 12.88 144.64 7.44
Fixed Assets 25.54 24.65 13.61   9.98
Inventories 40.79 34.50 23.28   17.96
Cash and bank balances 0.17 1.77 0.15   0.41
Loans and Advances 14.31 9.55 3.37   2.93
Sundry Debtors 21.65 7.28 5.09   9.55
Long Term Debt 35.21 26.50 17.73   10.45
Current Liabilities 21.88 19.44 14.86   21.94
Deferred Tax Liability 3.11 2.99 1.93   1.31
           
Issue Related Facts          
No of Shares before the issue (Cr) 0.83        
No of Shares after the issue(Cr) 1.21        
Share Price at upper band 210        
Share Price at lower band 200        
Net Worth after the issue at upper band (Cr) 125.17        
Net Worth after the issue at lower band (Cr) 121.35        
Book Value before the issue (Rs) 54.45        
Book Value after the issue at upper band (Rs) 103.65        
Book Value after the issue at lower band (Rs) 100.49        
           
Valuations          
EPS(last twelve months) (Rs) 14.49        
Price Earning Ratio at upper band 14.50        
Price Earning Ratio at lower band 13.81        
Return on Average Net Worth (%) 34.32 61.23 54.82    
Return on Capital Employed(%) 42.70 49.20 42.30    
Long Term Debt/Equity 0.78 0.84 1.38   1.40
Price to book value at upper band  3.86        

Legend
9D07
: 9 months ending December 2007
YM07: Full year ending March 2007
YM06: Full year ending March 2006
YM05: Full year ending March 2005

Industry overview

1. Global Scenario
In the year 2006 the total pharmaceutical market grew 7.0% to reach $643.00 billions. The contribution to sales for different regions were as follows. 

Region US$Bn % of Global Sales
North America 289.9 47.70%
Europe 181.8 29.90%
Japan 56.7 9.30%
Asia/Africa/Australia 52 8.60%
Latin America 27.5 4.50%

2. Indian Pharmaceutical Industry 

  • The Indian Pharmaceuticals sector has come a long way, being almost non-existent during 1970, to a prominent provider of health care products, meeting almost 95% of country's pharmaceutical needs.
  • Currently the Indian pharmaceutical industry is valued at approximately US$ 8.0 billion.
  • Indian pharmaceutical industry can be widely classified into bulk drugs and formulations.
    Bulk drugs (Indian name of Active Pharmaceuticals Ingredients)
    The Indian API manufacturing industry is the third largest in the world with sales of US$2 billion (€1.56bn) in 2005, and is expected to touch US$4.8 billion by 2010, at an average yearly growth rate of 19.3%.The bulk drug market is fragmented with about 1,333 pharmaceutical companies. Near about 70% of the bulk drug manufactured in India is exported to more than 50 countries. The market size is expected to grow at higher percentages in future years with more and more international companies depending on India to meet their bulk-drug supply needs.

    Formulations
    The formulation segment as on 2004 is valued at Rs.293 billion. Most of the domestic demand for formulations is met by the domestic industry.
  • Globally, the Indian industry ranks 4th in terms of volume and 13th in terms of value.
  • Indian pharmaceuticals industry has over 20,000 units. Around 260 constitute the organized sector, while others exist in the small scale sector.
  • However, the Indian pharmaceutical sector is currently undergoing unprecedented change. This can be attributed largely to the country's introduction of product patents on January 1, 2005.

3. Major Drivers of Indian Pharmaceutical Industry

  • Research and development
  • CRAMs
  • Growing Exports
  • USFDA plants and DMF filings

Peers comparison

SMS Pharma         Dishman Pharma  
  YM08 YM07 YOY   9M07 9M06 YOY
Total Income 215.6 198.58 8.57   593.4 380.05 56.14
Net Profit 27.06 25.47 6.24   81.7 59.82 36.58
Net Profit Margin 12.55 12.83     13.77 15.74  
Shares 1       7.75    
EPS 27.06       14.02    
Share Price 233       300    
PE 8.61       21.40    
M Cap 233       2325    
               

Reason to invest

  1. Growth in Indian bulk drug market
    The Indian bulk drugs market is expected to touch US$4.8 billion by 2010, at an average yearly growth rate of 19.3%. 
  2. Financial Indicators
    The financial indicators of Anu's (not of other group companies) are good. The company is growing, increasing sales and profits and also increasing its profit margins. Returns on Networth and returns on capital employed are very good.
  3. Research & Development
    The company has a team of 25 chemists who are engaged in research and development. Its in-house R&D team has manpower to handle complex molecular synthesis and operations.
  4. Existing client relationship
    The company has existing client relationships with pharmaceutical companies in domestic and international markets from whom it gets repeat orders.
  5. Market Penetration
    It has been awarded the "Market Penetration Leadership in the Indian Pharmaceutical Intermediates Market Award" by Frost & Sullivan for the year 2005 for demonstrating excellence in capturing market share within the Industry, excellence in product innovation, marketing and sales strategies.

Reason not to invest

  1. No Competitive edge
    Anu Lab is mainly present in commodity business of manufacturing drug intermediates. It plans to increase its presence in contract research and manufacturing (CRAM) space. This is a very competitive field and operational efficiency (cost control) is the name of the game.
  2. Small Size of operations
    Anu Lab has a very small size of operations. It has a balance sheet size of only Rs 100 cr and networth of Rs 45 cr. Anu's may find it difficult to survive in bad times.
  3. Execution Risk
    Anu Lab is borrowing Rs 80 cr through this IPO which is significant as compared to its networth of Rs 45 cr. Any shortcomings in implementing the objectives of the issue could cause significant harm to the company.
  4. Product Concentration
    Significant product concentration, with three products accounting for 79% of 2006-07 revenues.
  5. Client Concentration
    High client concentration, with 47.5% of 2006-07 coming from a single client.
  6. Bad Financial Profile of Promoter Group companies
    Nitya Laboratories Limited, Zen Chemi Consultech Private Limited and Zen Absorptions Private Limited have incurred losses during the last three audited financial years.

IPO Grading

  • ICRA has assigned an IPO Grade 2 on a scale of 5, indicating below average fundamentals.

Investment Strategy

Listing Gain

  1. Anu's should list at a discount to the offer price.
  2. Since Anu's has a decent financial profile there are chances that it might list with a marginal listing gain. But the chances of this happening are very slim.
  3. If markets are not peforming well at the time of listing Anu's stock can take a beating since Anu's is a very small name.
  1. Anu's is a small company and present into a commodity business which makes this issue very risky.
  2. The only positive for the company is its decent financial profile (excluding promoter group companies).
  3. Price earning multiple of around 15 and price to book of around 4 is too high a price to pay for Anu Labs.

 Based on the above parameters we recommend to avoid the issue.


Conclusion / Investment Strategy

Anu's is a small company and present into a commodity business which makes this issue very risky. we recommend to avoid the issue.

Reviewer recommends Avoid to the issue.

Review By Chittorgarh.com Team on May 11, 2008









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