Bafna Pharmaceuticals IPO Analysis

Scalability concerns, low profitability and presence in the highly competitive formulations business without a specific niche, peg up the risks associated with the Initial Public Offering of Bafna Pharmaceuticals.

The 27-year-old company is proposing to offer 40.05 per cent stake to the public and use the net issue proceeds (of Rs 23.55 crore) to mainly undertake brand-building in domestic and international markets, partly repay loans and procure R&D equipment.

The fixed offer price at Rs 40 per share, also does not leave much on the table for investors, as it discounts the 2007-08 (annualised) earnings per share of the company at 37 times, on the post-issue equity base.

The pricing appears stiff compared to similar sized players in the formulations business, as well as other entrenched players engaged in Contract Research and Manufacturing Services (CRAMS) — an area Bafna is targeting through its new facility at Grantlayon, near Chennai.

Though CRAMS is an exciting opportunity for Indian companies, Bafna’s size does not instil the necessary confidence in its ability to quickly occupy a position of strength and profitability in this area.

Bafna has long experience catering to less-regulated countries such as Sri Lanka but only limited experience in carrying out CRAMS in regulated markets.

Though these factors argue against an investment in the IPO, the stock may be worth reviewing, post-listing, with a longer financial record.
Business profile

Bafna Pharmaceuticals’ profits have grown by 12 per cent on the back of 23 per cent growth in net sales on a compounded basis across five years.

The company now draws all of its revenues from its manufacturing facility at Madhavaram, near Chennai; a scale-up in revenues and margins could be expected once the Grantlayon unit gets MHRA accreditation, allowing it to enter the regulated markets of the UK and other European countries.

The company has signed a five-year agreement to supply Simvastatin — a drug to lower cholesterol levels — to a UK company.

However, it will be a little unreasonable to expect Bafna’s Grantlayon unit to make considerable contribution to both topline and bottomline over the next 12-15 months because the business may take time to scale up its client base.

This could put pressure on existing financials as planned brand-building exercises, consisting of significant deployment of human resources in marketing, would see a bulge in expenditure from hereon, thereby shrinking already low operating margins (7 per cent).

Bafna displays high client concentration (top five contribute 80 per cent) and product dependence (top five contribute 65 per cent of sales) — typical of smaller entities.

Bafna plans to further scale up domestic business (exports contributed 30 per cent in last nine months ended December 2007) and launch its own brands as well as cater to new therapeutic areas (life-style diseases).

Challenges to these will arise from the substantial presence of large established players and Bafna’s small scale of operations.