Parabolic Drugs Limited (Parabolic) is tapping the capital markets with an issue to raise Rs 200 crs in a price band of Rs 75-85. The issue comprises a fresh issue and also a small offer for sale from two private equity players who are offering 1/3rd of their stake. The issue opens on Monday the 14th of June and closes on Wednesday the 16th of June for QIB’s and on the 17th of June for all other investors.

Business

Parabolic is engaged in the manufacturing, including contract manufacturing of API’s (active pharmaceutical ingredients) and API intermediates for the domestic market as well as for exports to international markets, including regulated markets. API’s also known as bulk drugs or bulk actives are the principal ingredient used in making finished dosages in the form of capsules, tablets, liquid or other forms of dosage. The company currently produces the SSP (Semi Synthetic Penicillin) and Cephalosporin range of antibiotics in oral and sterile form along with their intermediaries.

The company is promoted by first generation entrepreneurs Mr Pranav Gupta and Mr Vineet Gupta both engineers by qualification. Parabolic has two manufacturing facilities at Derabassi in Punjab and Panchkula in Haryana. Parabolic commenced operations in 1998. At Derabassi the company has six units and the same is WHO-GMP and ISO-14001 certified. In Panchkula the company has two units and is also manufacturing API intermediates like 6-APA.

The company has also set up and commissioned a custom synthesis and R&D centre at Barwala in Haryana. This centre was commissioned in the last quarter of 2009-2010. The company through this centre provides contract research services to innovator companies. Parabolic is in the process of setting up another manufacturing facility at Chachrauli, Derabassi to manufacture the non antibiotic range of API’s which is expected to commence commercial operations in fiscal 2012.

The current product portfolio comprises of 44 API’s and 7 API intermediates which are sold domestically and exported. The products are exported to 45 countries including the regulated markets. The company has 7 DMF’s filed with the USFDA, 1 DMF filed with the Bureau of Pharmaceutical Sciences, Canada and 9 dossiers filed with EDQM including two for which certificate of suitability has been received.

Objects of the Issue

The investment in the subsidiary Parabolic Research Labs Limited is being made to set up a custom synthesis and manufacturing site at IT Park Panchkula. This lab would be employing very highly qualified personnel and intellectuals from scientific background. In keeping with the present trend of having research in a separate company, this subsidiary has been planned where key personnel may have ownership interests as well.

Financials

The company has been growing at a CAGR of 68% over the last four years. Its total income was Rs 273.94 crs for the year ended March 2008 which grew to Rs 396.94 crs in the year ended March 2009. In the first nine months of the year 2010 they have grown to Rs 350.16 crs. On an annualised basis the same would become in the region of Rs 467 crs but there is some seasonality in the sales of the company with roughly 40% revenue in the first half and the remaining 60% in the second half. I believe the company is likely to end the year somewhere in the region of Rs 500-520 crs topline.

The company has earned a net profit of Rs 29.67 crs for March 2008 and Rs 21.09 crs for March 2009. There was an aberration in 2009 with the global slowdown and currency fluctuation and working capital interest costs going up the company had a onetime hit which affected the profit. In the nine month ended December 2009 the company has earned a profit of Rs 21.41 crs which on an annualised basis works out to Rs 28.55 crs and on the assumed basis would work out to between Rs 30.5 crs to 31.5 crs.

Valuations

This issue has an offer for sale component where two private equity investors are selling 1/3rd of their holding. It is important to note that they chose to sell only 1/3rd even though the agreement allowed a complete exit if they so desired. In January 2010 a Strategic Japanese investor Kyodo bought 4lac shares at a price of Rs 100. This is not a stake sale but a strategic one because the company is involved in pharmaceutical business and distribution in Japan over last many decades. The next big thing in pharma space is the opening up of the generic business in Japan and this association would go a long way in helping Parabolic.

Based on the earnings for 2009 December annualised for the year of Rs 7.75 the share is being offered at 9.68 to 10.97 times at the lower and higher band respectively. The earnings on a fully diluted basis is not the correct way to value this share because the capacity expansion already under way and expected to complete by September and December 2010 will increase the capacity by 40% this year and another 40% next year. With such massive expansion happening there has to be dilution or borrowing to fund growth. The promoters of Parabolic chose dilution as an option to fund growth and almost double capacity in less than two years.

Growth Drivers

The company has been steadily expanding its sales in the international markets and from a mere Rs 15.3 crs in 2007 have grown to Rs 109 crs in 2009 and Rs 97 crs in nine months of 2009-2010. The client list has expanded from 244 in 2007 to 487 in 2010 and this helps in utilisation of new capacity going forward. The realisation per kilo of product sold has been increasing over the years. CRAMS is the buzz word and the company is well poised to capture the opportunity to capture this. Very recently they have signed an agreement with Ranbaxy to exclusively manufacture for them two new molecules. This will give the company better margins and long term visibility. Ranbaxy is amongst their top customers and they have been doing lot of business for them.

Risks

Pharmaceutical business particularly research is a testing and time consuming business. Drug discovery is not an everyday affair and Parabolic is not new to it. They have tasted success and going forward as they expand their manufacturing facilities and research facilities the success of this division would play an important part. Pharma manufacturing has a large part of its raw material which are imported and their prices and foreign currency are both volatile. With exports of Parabolic hovering in the region of 28-30% there is some amount of risk mitigation and the balance can be covered by forex cover.

Conclusion

The company offers growth prospects and investors with a medium to long term time frame of investment will be amply rewarded. In the short term Indian markets mirroring global cues particularly European markets have been extra volatile and Parabolic would be no exception. I believe this company should report a profit after tax of Rs 70-75 crs after the expansion is completed translating into an EPS of Rs 12 to 12.75 for the year ended March 2012. The first year of full capacity available would be 2012-2013.

Subscribe for the medium and long term only.

SEBI disclaimer: – I intend to subscribe to the above issue.