Anu’s Laboratories IPO Analysis

Anu’s Laboratories, Started in Hyderabad in 1996 by K. Hari Babu, Anu’s Laboratories e manufactures basic and advanced intermediates and fine chemicals. Some of the key intermediates produced are 2,4-dichloro-5-fluoro acetophenone (DCFA) (an intermediate for synthesising quinolone antibiotics like ciprofloxacin), chlorohexanone (key intermediate in the manufacture of cardio vascular medicine), methyl-4 (4-chloro, 1 oxo butyl),and di-methyl acetate (an intermediate used to manufacture Fexofenadine, an anti allergic drug). These three intermediates accounted for around 29%, 24% and 9% of the company’s sales in the nine months ended December 2007. Exports to Israel, Italy, Japan, France, USA and Singapore accounted for around 20% of the sales in this period.

As a forward-integration measure, Anu’s Laboratories has proposed setting up a plant for manufacturing drug intermediates including active pharma ingredients (APIs) at Jawaharlal Nehru Pharma City, Vishakhapatnam, Andhra Pradesh, for Rs 55.09 crore. Land measuring 9.54 acres has been purchased by paying an initial sum of Rs 0.91 crore. A separate development-cum-service agreement for development of this land has been entered with Andhra Pradesh Industrial Infrastructure Corporation (APIIC) and Ramky Pharma City (Ramky). Commercial operations are expected by April 2009.

To bolster its contract research and manufacturing (CRAMS) & R&D operations, Anu’s Laboratories is to set up a pilot plant at Jawaharlal Nehru Pharma City for Rs 8.34 crore. From the IPO proceeds, Rs 16.67 crore is to be earmarked for meeting long-term working capital requirement.

From internal accruals, Rs 12 crore will be deployed for the expansion programme and meeting issue expenses. By 7 April 2008, Rs 1.29 crore had been utilised.

Weaknesses

Around 53% of the revenue was from the sale of two products: DCFA and CIS Lactum in the nine months ended December 2007. Any decline in the sales of these products or potential substitute or volatility in the prices of these products may adversely affect the financial performance.

Dr. Reddy’s Laboratories accounted for around 47% of the revenue.

About 34% of the sales were from products manufacturing, outsourced to a promoter group company, Nitya Laboratories. This can lead to conflict of interest. Moreover, Nitya Lab has been incurring losses, has overdues to banks and is involved in various legal proceedings.

Valuation

Anu’s Laboratories has set a price band of Rs 200 to Rs 210 per equity share of Rs 10 face value. At the lower band of Rs 200 per share, the P/E would be 13.8x times annualised EPS of Rs 14.5 for the nine months ended December 2007 and 17.8x times the EPS of Rs 11.3 for the year ending March 2007 (FY 2007) on post-issue equity of Rs 12.08 crore. At the upper band of Rs 210 per share, the P/E would be 14.5x times and 18.7x times, respectively. In the pharmaceutical industry (bulk drug and intermediates), comparable companies such as Neuland Labs, Aarti Drugs and SMS Pharma have TTM P/E of around 9.5, 4.8 and 10.4, respectively.