Brooks Laboratories Ltd IPO Review (Avoid)

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Review By MLR Securities Private Ltd on Aug 18, 2011

Issue Period: 16th Aug - 18th Aug
Price Range: INR 90-100
Issue Size: INR 63 Cr
Mcap: INR 152-168 Cr
IPO Grading: ICRA IPO Grade 2
BRLM: D&A Financial Services
Promoter: Atul Ranchal & Rajesh Mahajan
Listing: BSE & NSE

Company Background

Brooks Laboratories provides contract manufacturing services from its WHO-GMP certified unit at Baddi, Himachal Pradesh. The company's product range includes dry powder injectables, ampoules and liquid vials, dry syrups and tablets catering largely to the antibiotic and anti‐tuberculosis (anti‐TB) therapeutic segments. It caters principally to domestic pharmaceutical companies such as Aristo Pharmaceuticals Private Limited, Hetero Healthcare Limited, Zydus Cadila, Sanat Products Limited and Wockhardt Limited. The company's product portfolio presently comprises of 26 Dry Powder Injections, 31 Liquid Injections, 5 Tablets and 2 Dry Syrups which are marketed domestically. It has annual capacity of 3 crore injections, 12 crore tablets and 1.2 crore dry syrups. Brooks is promoted by Mr Atul Ranchal and Rajesh Mahajan. Both the promoters have prior experience in the pharmaceutical
industry and are actively involved in the daily operations of the company.

Objects of the Issue

• To set up new manufacturing unit at JB SEZ Pvt Ltd, Panoli, Gujarat for manufacturing of various pharmaceuticals formulations - Rs 52 Cr
• To meet Long Term Working Capital requirement - Rs 5 Cr

Financials & Valuations

• The company's topline grew at a CAGR of 18.2% in the last five years to Rs 53 Cr in FY11 while the bottolmline grew at CAGR of 48% to Rs 7 Cr during the same period. The company did an EBITDA margin of 17% and a PAT margin of 13% in FY11.
• The operating margins of the company have been volatile, largely owing to volatility in key raw material prices while the improvement in profitability witnessed in recent years has been largely driven by a better product mix with increased sales of niche products having higher realisations.
• The company's unit at Baddi, Himachal Pradesh is eligible for 100% tax holiday for the first five years starting from FY 2007 and 30% for the subsequent five years and full excise duty exemption for first ten years starting from FY 2007. Hence, the 100% tax exemption benefit is set to be withdrawn after FY 2011 thereby impacting the net profitability of the company.
• The company's return ratios are quite healthy with an RoCE of 30% and RoNW of 36% in FY11. The company's leverage is quite comfortable with debt equity level of 0.4 pre issue.
• The company's market cap is Rs 168 Cr on an upper price band of Rs 100 which is 3.2 times its FY11 revenues. Brook is asking for a post issue valuations of 21‐24 times FY11 EPS and a price to book value of 1.9-2.1.