Syncom Healthcare Limited (SHL) is tapping the capital markets with an issue of 75 lakh shares in the price range of Rs 65-75. The issue opens on Wednesday the 27th of January and closes on Friday the 29th of January 2010.

Business

SHL began operations in the year 2002 as a manufacturer, marketer and trader of formulations under its own brands in Ethical, OTC, Generic and Herbals. The first manufacturing unit was set up Dehradun in Uttrakhand and the unit was commissioned in November 2006.

SHL outsources its requirement of finished products from units in and around Indore. These products are manufactured under SHL’s brand name, license and quality control. In 2008-2009 of the 60 cr turnover half of it came from traded activities or items manufactured for the company by third party manufacturers.

SHL has approvals to manufacture various formulations and it is currently manufacturing some 250 formulations in different delivery forms such as tablets, capsules, ointments, liquid, powder and eye and ear drops.

The Company’s product-mix is fairly large with Anti-biotics, Anti-inflammatory-analgesics, Anti-allergics, Anti-cold, Anti-cough, Anti-fungal, Anti-diarrhocals, Anti-oxidants, Vitamins, Proteins etc. The present capacity utilization of the plant at Dehradun is roughly 50% and the same is expected to increase to 60% in 2010-11 and 70% in 2011-12. The new facility proposed to be set up in Pithampur is expected to be ready in the 4th quarter of 2010-2011.

Financials

The turnover of the company has grown from Rs 51.74 crs in March 2008 to Rs 60.56 crs in March 2009 and to Rs 20.99 crs in the first four months ended July of 2009-10. If one were to annualize the same the figure for year ended March 2010 would be Rs 62.97 crs. The net profit for the same period is Rs 3.67 crs for March 2008, Rs 3.81 crs for the year ended March 2009 and Rs 1.6 crs for the four months ended July 2009. Annualizing the numbers for the year ended March 2010 the same would be Rs 4.8 crs. The net margins for the three periods are 7.09%, 6.29% and 7.62%.

The margins are under pressure and very clearly even the sales growth seems to be missing. The sales have grown by 17% in 2009 over 2008 while they have grown by a mere 3.98% in the current year 2009-10 over 2008-09. The margins which had gone down in 2008-09 compared to 2007-08 have improved in the current year and the IPO could be one reason.

SHL has separated from another company having the same name and is listed namely Syncom Formulations Limited. There was a family separation and the brand name is allowed to be used by both the companies. This company reported sales of about Rs 58.23 crs for the year ended March 2009; net profit of Rs 1.23 crs and a market cap of Rs 26 crs.

Based on the current equity the EPS of SHL on 2008 numbers is Rs 3.66for March 2008, Rs 3.81 for March 2009 and Rs 4.8 for March 2010 on an annualized basis. If one were to take the same on a fully diluted basis for March 2009 the same would be Rs 2.18 for March 2009 and Rs 2.74 for March 2010 on an annualized basis.

Objects of the Issue

Comparison

The company SHL is a small cap company in the pharmaceutical space. There is demand in the pharmaceutical industry and it is growing at a very rapid pace. The GDP growth coupled with a rising population make India a great place to be in for the industry. Coupled with the fact that this is a knowledge based industry, quality producing centre, low cost producer, high degree of skilled manpower, all point to a vibrant pharmaceutical industry. Competition is very severe and margins are certainly thin and under pressure.

The company has chosen to compare itself with Venus Remedies a company with sales of Rs 264 crs in 2009 and Rs 230 crs in nine months of 2009-10. Its net profit was Rs 45.53 crs for 2009 and Rs 32.98 crs for nine months 2009-10. The market cap of the company is Rs 203 crs and its PE based on current year annualised earnings a mere 4.63.

Yet another comparison by the company is with Kilitch drugs which had a turnover of Rs 129 crs in March 2009 and Rs 60.22 crs in the half year ended September 2009. Its net profit is Rs 11.14 crs for March 2009 and Rs 7.26 crs for the half year ended September 2009. Its market cap based on half year annualised numbers and EPS of Rs 11 is Rs 176.48 crs.

Looking at the numbers of SHL the price earning multiple based on March 2009 numbers on a fully diluted basis would be 29.81 times at the lower price band and at 34.40 times at the higher price band. The same numbers based on March 2010 numbers would be at 23.72 times at the lower price band and at 27.37 times at the upper price band. Very clearly the issue is outrageously priced and leaves nothing for an investor for quite some time to come.

Current valuations of large pharmaceutical companies which have a market capitalisation of 13,000 crs and 26,000 crs in Glaxo and Cipla are far cheaper in PE than the stock on offer.

Conclusion

The industry is growing and has a huge growth potential without doubt. The company is raising money from the market for expansion even though it has enough spare capacity available with just about 50% of its present capacity being used currently. The pricing is extremely expensive and there is no way that investors can make money based on fundamentals.

I believe at a time when there are almost three new issues opening every week, this issue should be skipped completely.

SEBI disclaimer: – I do not intend to subscribe to this issue.