Parabolic Drugs IPO Review

Investments can be avoided in the initial public offering of Parabolic Drugs, which is engaged in the manufacturing and contract manufacturing of active pharmaceutical ingredients (API), and API intermediates for domestic and export markets. At the price band of Rs 75-85, the offer is priced at 14-15 times its likely FY-11 per share earnings on a post-offer equity base.



This appears expensive since comparable peers such as Nectar Life Sciences and Dishman Pharma are available at lower valuations. While Parabolic Drugs is making the right moves in expanding the scope of its operations and products, it may take a while before the company begins to reap the benefits from its proposed projects. Besides execution risks, increasing competition and tougher business environment in regulated export markets too call for some restraint.

Investors may be better off considering the stock later when valuations seem more conducive.

Company Overview

Parabolic Drugs supplies APIs to a number of domestic and international companies, and owns and operates two manufacturing facilities at Derabassi, Punjab (WHO-GMP compliant), and Panchkula, Haryana (USFDA compliant). It has a product portfolio comprising of 44 APIs and seven API intermediates; it also produces the semi synthetic penicillin (SSP) and cephalosporin range of antibiotics in oral and sterile form, along with their intermediates.

The company has also made modest inroads in regulated markets, what with seven DMFs (Drug Master Files) filed with USFDA, one with Bureau of Pharmaceutical Sciences, Canada and nine dossiers filed with EDQM, two of which have received Certificate of Suitability.

The company plans to primarily use the IPO proceeds towards capacity expansion at various manufacturing units.

Prospects and challenges

Its current product range in cephalosporins straddles primarily across second- and third-generation cephalosporins. They are a range of antibiotics used to treat infections and industry estimates peg the global market for its various combinations at an attractive $21 billion.

Parabolic has made healthy progress in this segment, almost quadrupling its cephalosporin volumes in the last two years (as of FY09); there has, however, been a slight dip in realisations.

The segment's revenue share has also risen over the years, from about 26 per cent in FY-07 to over 55 per cent in the nine months ended December 2009. This augurs well given the higher realisations enjoyed by the product segment.

The company's other significant product segment, SSPs, in comparison, is more of a volume play. Expansion of product portfolio to include non-antibiotic segment, therefore, holds growth potential.

The company also nurtures plans to enter the CRAMs space and has already commissioned its first site. While this will in essence only leverage on its existing capabilities, it merits note that the CRAMs, despite its expanding business opportunities, is likely to be highly competitive (some of the existing domestic players have unused capacity).

While the company has over the years built a fairly strong clientele, which can give it the vantage to attract business opportunities for its CRAMs venture, it may take a couple of years before sustained revenue flow begins.

To the company’s credit, it has chartered a high growth trajectory over the last three years, expanding its revenues and profits at a compounded rate of over 65 per cent and 43 per cent respectively (as of FY09). For the nine-months ended December 2009, the company clocked a net profit of Rs 21.4 crore on net sales of Rs 346 crore. Growth however was from a low base.

Besides, net profit margins fell over the same time driven by higher interest outgo, negative operational cash flows, forex losses, and high gearing (debt-equity of over 3 times). Though its leverage would come down post the public offer, there may be little reprieve on the interest outgo front in the medium term. The company plans to use part proceeds from the IPO to retire debt amounting to Rs 39 crore, but it still will have outstanding debt of about Rs 329 crore (bulk of it is with floating rate of interest).

Offer details

The initial public offer is open between June 14-16. The company seeks to raise about Rs 200 crore, including an offer for sale of 20.52 lakh shares by two its private equity investors. Avendus Capital and ICICI Securities are the book-running lead managers.

via BL