Valuations offer no scope for appreciation
Brooks Laboratories is tapping the capital markets with its IPO which has opened on Tuesday the 16th of August and closes today the 18th of August. The company is raising Rs 63 crs in a price band of Rs 90-100.
| Price Band | Rs 90 – Rs 100 |
| Issue Size in Rupees | Rs 6300 lacs |
| Issue Size in Shares | 70,00,000 Equity Shares at Rs 90 to 63,00,000 Equity Shares at Rs 100 |
| QIB’s | 35,00,00 Equity Shares at Rs 90 to 31,50,000 Equity Shares at Rs 100 |
| Non Institutional Investors | 10,50,000 Equity Shares at Rs 90 to 9,45,000 Equity Shares at Rs 100 |
| Retail Investors | 24,50,000 Equity Shares at Rs 90 to 22,05,000 Equity Shares at Rs 100 |
| Book Running Lead Manager | D & A Financial Services Private Limited |
| Isssue Opening Date | Tuesday 16th August |
| Isssue closing date | Thursday 18th August |
| IPO Grade | ICRA grade 2/5 indicating below average fundamentals |
| Paid -up Capital Pre IPO | 98,86,422 Equity Shares |
| Paid -up Capital Post IPO | 1,68,86,422 Equity Shares at Rs 90 to 1,61,86,422 Equity Shares at Rs 100 |
| Market Cap post listing | Rs 15197 lacs at lower band to Rs 16186 lacs at higher band |
| Bid Lot | 60 shares |
| Bidding Amount for Retail | 1980 shares at Rs 100 or Rs 1,98,000 per application |
Business
The company is in the business of manufacturing injections, dry tablets and dry s company is in the business of manufacturing injections, dry tablets and dry syrups in the state of Himachal Pradesh at Baddi. The company has an installed capacity of 300 lac injections, 1200 lac tablets and 120 lac numbers of dry syrup. The present product portfolio comprises of 28 injectable, 19 tablets and 2 dry syrups which are marketed domestically. The company also manufactures for companies like ZydusCadila, Aristo Pharma, FDC, NectarLifesciences amongst others. Baddi has 100% excise exemption for the first 10 years and a tax break of 100% for the first five years and then 30% for the next five years.
Objects of the issue
The objects of the issue are as follows: –
| 1. | To set up new manufacturing unit at JB SEZ Pvt Ltd for manufacturing pharmaceutical formulations |
| 2. | To meet long term working capital requirements |
| 3. | To meet general corporate purposes. |
| 4. | To meet issue expenses and listing of shares on stock exchanges. |
Financials
The turnover of the company has increased from Rs 4383.15 lacs in March 2009 to Rs 4545.35 lacs in March 2010 and Rs 5319.92 lacs in March 2011. The net profit has however jumped from 296.07 lacs in March 2009, to Rs 519.62 lacs in March 2010 and Rs 688.79 lacs in March 2011. The net margins have almost doubled from 6.75% in March 2009 to 12.95% in March 2011. This jump in margins seemsunexplainable and unjustified. A job work and small scale marketer of products does not enjoy such margins.
| year 2009 | year 2010 | year 2011 | |
| Income | |||
| Of Products Manufactured by the issuer | 4492.6 | 4506.9 | 5253.9 |
| Of Products traded by the issuer | 0 | 0 | 0 |
| Total revenue | 4492.60 | 4506.90 | 5253.90 |
| Other Income/job work | 4.15 | 14.51 | 24.01 |
| increase/decrease in stock | -113.60 | 23.94 | 42.01 |
| Total Income | 4383.15 | 4545.35 | 5319.92 |
| Raw materials consumed/Purchases | 3354.80 | 3309.80 | 3746.50 |
| Other expenses | 708.20 | 688.40 | 843.80 |
| Total Expenses | 4063.00 | 3998.20 | 4590.30 |
| Profit before tax | 320.15 | 547.15 | 729.62 |
| Provision for tax | 24.08 | 27.53 | 40.83 |
| Profit After Tax | 296.07 | 519.62 | 688.79 |
| NET MARGINS | 6.75 | 11.43 | 12.95 |
Comparison
The company has chosen to compare itself with two companies namely Amrutanjan Health Care and Bafna Pharmaceuticals Ltd. Amrutanjan is into a niche product namely manufacturing pain balms and has a very low equity base of just 3.03 crs or 30 lac equity shares. BafnaPharma is now in the process of expanding its manufacturing activities after getting the necessary regulatory approvals in UK to enter the European markets and also markets in Africa.
Brooks Laboratories earned Rs 519.62 lacs in March 2010 which means an EPS of Rs 5.25 on the old capital of Rs 98.86 lac shares or Rs 988.64 lacs. The EPS for the year ended March 2011 would improve to Rs 6.96 on the basis of historical capital.
Merchant banker’s track record
The last issue brought to the capital markets by the merchant banker D & A Financial Services Pvt Ltd was ShilpiTechnocables Limited. The company had issued shares in a price band of Rs 65-69 and the shares listed on the 8th of April. The price chart below shows how the shares have fallen to a dismal level of Rs 13 as of yesterday.
Valuations
The company is offering its shares at a PE multiple of 22.06 times at the lower end of the price band of Rs 90 and at 23.53 times at the upper end of the price band. This is yet another company who has chosen not to meet members of the investing community or people from the media in connection with its IPO. Very clearly this and the size of the issue, steep valuations and the current state of the market make me fairly worried about the prospects of the company going forward.
Conclusion
They say in the English language “when in doubt stay away” and I believe this would be the best thing to do in this issue. At the time of writing this article there is not even a single bid from QIB’s.
SEBI Disclaimer: – I do not intend to subscribe to the above issue.
