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.

Thangamayil Jewellery Limited (TJL) is tapping the capital markets with an issue to raise Rs 2875.25 lakhs in a price band of Rs 70-75. The issue opens on Wednesday the 27th of January and closes on Friday the 29th of January. The name Thangamayil is actually two words together which mean gold and peacock. Thangamayil in tamil means ‘Golden Peacock’ and that is also the logo of the company.

Business

The company is in the business of gold jewellery, diamond and platinum jewellery. The company has a manufacturing unit near Madurai where it manufactures ornaments which are made to order and general articles of jewellery like chains and bangles. It also procures gold jewellery from various dealers across India like West Bengal, Gujarat, Andhra Pradesh and Kerala. The company sells gold jewellery made from 22K and assures its customers of the quality it sells.

TJL is into retail marketing and has its largest showroom in Madurai. It is spread over three floors and covers an area of 11,416 sq feet. Besides Madurai the company has showrooms in Ramanathpuram, Dindigul, Karaikudi and Rajapalayam. It is the stated objective of TJL to spread within Tamil Nadu and have its presence in tier 2 towns only. It is for this reason that they have not gone to cities like Chennai or Coimbatore. They are in the process of opening new shops at Tuticorin, Theni, Nagercoil, Thirunelveli, Kovilpatti and Sivakasi.

These additions will take the number of outlets from the present 5 to 11. TJL has introduced a concept of price guarantee. It will buy back gold jewellery for remaking from its customers and the price of gold is fixed. There is one price of gold for buying and selling and on this price old jewellery is bought. This assurance helps in the business and attracts customer loyalty.

Goldsmiths were the way business was done historically in India. One had to give gold to a goldsmith, and you approved a design, and then he hand crafted the same. Stories of mixing of the gold, quality, less weight etc were quite normal those days. Slowly but surely the goldsmith is becoming a thing of the past, and organised manufacturing and retailing are taking over. In organised retailing one gets to see a variety and can invest in buying jewellery instantly. With modern equipment one can test the purity of gold as well.

The prospects for organised retail are improving and the fact that India is one of the largest consumers of gold in the world will help matters. The opportunities going forward will help this kind of business.

Financials

TJL had total income of Rs 224.60 crs for the year ended March 2008 which grew to Rs 246.86 crs for the year ended March 2009. For the half year ended September 2009, sales have grown substantially to Rs 209.43 crs. Net Profit after tax has grown from Rs 5.61 crs in March 2008, to Rs 7.49 crs in March 2009. There has been a big jump in the half year where the profit is now at Rs 7.97 crs.

The equity of the company pre IPO is Rs 988.59 lacs which would increase to 13992 lacs if the price is fixed at Rs 70 or to Rs 13719 lacs if the price fixed is at Rs 70. Based on the pre-IPO equity the company reported an EPS of Rs 5.67 for March 08, Rs 7.58 for March 09 and Rs 16.12 for the half year ended September 2009 on an annualised basis. If we were to convert the earnings on a fully diluted basis the EPS for March 2009 would be Rs 5.35 and Rs 11.39 for the half year ended September 2009 on an annualised basis at the lower price band and Rs 5.46 for March 09 and Rs 11.6 for half year ended September 2009 on an annualised basis.

Objects of Issue

The above objects would be met by a combination of the IPO proceeds, pre-ipo placement and internal accruals of Rs 1283.59 lacs.

Comparison

We have quite a few listed players in the diamond trade like Shrenuj, Suraj Diamonds, Asian Star, Flawless Diamonds etc and a couple in the jewellery business like Gitanjali Gems and Renaissance Jewellery. TJL is strictly not comparable to the diamond players as there sales from diamonds is less than a few percentage points of their total sales. Secondly most of the diamond companies are exporters and overseas conditions and state of the economy plays a vital part in their business. Diamond is more of an upper class play and resale value of diamonds is not as much as gold simply because gold can be melted and the shape recast, while diamond cannot.

If we are to compare it with Gitanjali it is a mix of diamonds, brand and retail while TJL believes primarily in gold jewellery through its exclusive showrooms in tier 2 towns of Tamil Nadu with quality assurance and price guarantee being its salient features. On a fully diluted basis the offer price at the lower price band of Rs 70 is on a price earnings multiple of 6.15 and at the upper price band of Rs 75 the multiple is 6.47 times half year ended September 2009 results on an annualised basis.

Without talking of the future it would be appropriate to mention that all these showrooms would be up and running in the first quarter of financial year 2010-2011. The sales and profits of these showrooms would be reflected in the financial numbers of the calendar year 2010-2011. It should also be mentioned that Indians whether they are from rural India or urban India know the value and importance of gold. In every marriage and on important festivals, buying of gold is a ritual and almost mandatory. The shape of jewellery will change but not the metal. This offers multiple growth opportunities to such companies.

Conclusion

A straight forward business model where the focus is Tamil Nadu, tier 2 towns, gold jewellery and the USP is quality (22K gold hallmarking) and price assurance.  The company buys back gold jewellery at a price for the day. With a clear focus on markets, business and niche area this company will do well going forward. It should also be mentioned that with gold assaying machines (to check purity of gold) it helps in creating customer goodwill and increasing his confidence. I believe that though this is a low margin high volume game, the prospects are glittering and should help the company and its investors make money in the long run.

SEBI Disclaimer: – I intend to subscribe to the issue