Investors can give the initial public offering (IPO) of Pochiraju Industries a miss. The company, which is in the floriculture business, is diversifying into the pharma/biopharma space, for which it is raising funds through the IPO.
We note that given the low absolute price at which shares are offered — in the Rs 25-30 band — the possibility of listing gains cannot be ruled out, as investors have had a tendency to gravitate towards such offers in the past.
Our view, however, does not factor in such gains, and is more of a longer-term call.
In the offer price band, the stock would be available at about six-eight times its expected per-share earnings for FY-07 on an expanded equity base.
As of now, the company is purely in the floriculture business, with the pharma and biopharma ventures likely to start contributing (to revenues) later this year and next year respectively.
Given the company's small size and its positioning at the lower end of the market-cap curve, there is attendant volatility that investors will have to contend with.
Sticking to larger, established names would be a better option to play the pharma and biopharma theme, in our view.
Background to the offer
Pochiraju intends raising Rs 37.5 crore through the book-built offer. The offer proceeds are to be invested in setting up a couple of plants dedicated to manufacturing biotechnology-based products, apart from funding working-capital requirements of the pharma business.
For the latter, the company has entered into a loan licence agreement with a Hyderabad-based outfit for product manufacturing.
Recommendation rationale
While on a price-earnings basis, the stock might appear to be priced low, these are multiples that are normally accorded to companies in the floriculture space.
In the new areas that the company intends to enter, there are several key factors that drive success: The ability to scale, customer engagement skills and expertise in regulatory affairs, especially when it comes to cracking open overseas markets.
While the offer document mentions that the company enjoys good relationship with its customers (though no names have been given), there is no demonstrable evidence on the other two counts.
Even in the pharma and the biotech space that Pochiraju is eyeing, the marketplace is intensely competitive, more so in the former with regard to the domestic market.
In the biotech space, while the domestic market has recently seen the launch of human insulin, the action is more likely to take place in the European and American markets, as the roadmap for launching follow-on biologics is gradually falling into place.
While the market size would undoubtedly be large, we would rather stick to established names to capitalise on this opportunity as and when the market opens up.
Offer details
Of the total proceeds intended to be raised, Rs 3 crore would come in as promoter contribution; the rest would be raised from the public. Post-offer, and assuming that the issue is priced at the lower end of the band, the company's equity would almost quadruple to Rs 20.3 crore (about Rs 18 crore if priced at the upper end).
Allbank Finance is the lead manager to the issue, which opens tomorrow and closes on January 18.