IPO ANALYSIS: PARABOLIC DRUGS LIMITED – OVER PRICED - AVOID.

The Chandigarh based bulk drugs manufacturer is entering the capital market with an IPO. The company intends to mobilize Rs 200cr from the public offerings.
The company is proposes to issue 23.50 million equity shares in the price band of Rs 75-85, including offer for sale of 2.02million shares of Rs 10/-FV.
The issue will open on 14-06-10 and close on 17-06-09.

Pranav Gupta, Vineet Gupta, PNG Trading Private Limited and Parabolic Infrastructure Private Limited promote the company.

AVENDUS CAPITAL PRIVATE LIMITED and ICICI SECURITIES LIMITED are the BRLMs.

The above BRLMs recently managed Shree Ganesh Jewellery IPO along with another merchant banker. As against the issue price of Rs 265/- the share is currently quoting around Rs130/-

BUSINESS

The company is engaged in the manufacturing, including contract manufacturing of
Active Pharmaceutical Ingredients (API) and API intermediates for the domestic market as well as for exports. APIs, 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, with the addition of other APIs or inactive ingredients. The company also produces the Semi Synthetic Penicillin
(SSP) and Cephalosporin range of antibiotics in oral and sterile form, along with their intermediates.

Parabolic Drugs own and operate two manufacturing facilities at Derabassi, Punjab, and in Panchkula, Haryana. The commenced commercial operations in February 1998 by setting up a unit at Sundhran, Derabassi, to manufacture SSPs. It has six units at Sundhran, Derabassi, for manufacturing the oral and sterile range of Cephalosporin APIs and intermediates. The facility at Sundhran, Derabassi, is WHO-GMP and ISO-14001 certified. The second facility at Panchkula was established in fiscal 2005. Currently, the Panchkula facility has two units manufacturing SSPs and API intermediates such as 6 Amino Penicillin Acid. The company is in the in the process of setting up a custom synthesis and research and development centre at Barwala, Haryana, for development and scale-up of new APIs and APIs intermediates in all therapeutic segments, including non-antibiotic products. This facility is expected to commence operations in the last quarter of fiscal 2010, to focus on providing contract research services to innovator companies. In addition, the company is in the process of setting up another manufacturing facility at Chachrauli, Derabassi, to manufacture the non-antibiotic range of APIs, which is expected to commence commercial operations in the third quarter of fiscal 2011.

OBJECTS OF THE ISSUE

The company intends to utilize the funds for the following purposes:

1. Multi-purpose block III at Derabassi;
2. Sterile cephalosporin plant at Derabassi;
3. Establishment of manufacturing at Chachrauli.
4. Custom synthesis and manufacturing site II at IT Park, Panchkula;
5. Repayment / prepayment of identified loan facilities.

FINANCIALS:

The total revenue earned has increased from Rs. 15,056.33 lacs in fiscal 2007 to Rs. 39,693.70 lacs in fiscal 2009, and profit after tax has increased from Rs. 1,358.98 lacs to Rs. 2,109.20 lacs during this period. The total income and profit after tax as at September 30, 2009 were Rs. 23,342.56 lacs and Rs. 1,241.23 lacs, respectively. The net sales have increased at a CAGR of 62.50% from fiscal 2007 to fiscal 2009. Direct exports constituted 27.65% of our net sales in fiscal 2009, and 32.25% as at September 30, 2009.

MATTERS OF CONCERN.

• The company operates in a competitive business environment, both globally and domestically. Competition from existing players and new entrants and consequent pricing pressures will adversely affect the business..

• The pharmaceutical industry is highly regulated and the success of the company’s strategy of entering regulated markets is dependent on a number of factors beyond control the control of the company.

• Highly indebted company with floating rate of interest. As at September 30, 2009, the secured loan funds aggregated Rs. 30,385.83 lacs, all of which were at floating rates of interest which exposes the company to interest risk.

• Significantly dependent on imports of raw materials, particularly from China, and are to that extent exposed to risks including duties placed on imports from other countries.

• The name, business and logo of ‘Parabolic’ are not registered trademarks in the name of the Company.

• The funds requirement and funding plans are as per the company’s own estimates, and have not been appraised by any bank / financial institution.

• The average cost of acquisition of shares by promoters are as follows:

No. of shares Rs

Mr. Pranav Gupta 8, 24,100 3.50
Mr. Vineet Gupta 7, 01,550 3.42
Parabolic Infrastructure 58, 06,620 3.33

PNG Trading pvt ltd 1, 35, 70,800 3.43


IPO Grade – 2 by CARE

The grading is constrained by company’s unfavorable capital structure, project stabilization risk, volatility in prices of imported raw material along-with exposure to exchange risk because of imports and liabilities denominated in foreign currency, though partially mitigated because of direct exports. The grading factors in the strong growth in revenue reported in past, experienced management, approvals and certificates of suitability for few products from regulatory authorities in USA, EU and other regulated markets, reputed client base, strong focus on R&D activities and the company’s strategy to diversify into CRAMS business.


VALUATION AND RECOMMENDATIONS

For the FY 10 the company reported a net profit of Rs 21.10cr. The EPS on the post bonus and post issue equity works out to Rs 3.70. At the upper price band of Rs 85 the company demands valuation in excess of 20 PE. Companies like Neuland Lab and Nector life, who are in the similar line of business, are available at less than 9 PE. Grossly over priced. AVOID.

IPO FROM AN INTANGIBLE ASSET COMPANY: FAT PIPE NETWORKS INDIA LIMITED.

The company earned a net profit after tax of Rs 399.37 lacs for the year 08-09, which was transferred to General Reserve. The balance at the end of the previous year in General Reserve was Rs 49.97 lacs. If you add, the profit transferred this year, to the figure it should be Rs 449.34 lacs. Simple arithmetic. However, as per the statement of accounts as furnished in the DRHP filed with SEBI, the figure is Rs 2103.04 lacs. For the difference, the corresponding entry shown in the balance sheet is Intangible assets.

Consider the following risks factors:


• The Company operates in a highly competitive environment and the competitors could gain a significant advantage by introducing a new product in a particular segment before the Company does.

• The majority of the operations of the Company are carried out from its branch offices in the USA. Risks related to FEMA.

• The funds requirements are not appraised by any Bank or Financial Institution.

• The Company proposes to acquire businesses/companies located outside India, the company is yet to identify companies/ businesses to be taken over.

• The Company has not yet tied-up for debt component for enhanced working capital needs.

• The Company has not paid dividend in the past.

• The global operations expose the Company to complex management.

• The combined employee strength is 120 and 50% are in sales and marketing.

• The average cost of acquisition of Equity Shares by the Promoters is at Rs 10/-

• Receivables out standing as on 30-09-09 are at Rs1269.69 lacs, against a turnover of Rs 2958.68 for the same period.There are debts that are outstanding for more than 180 days.

• Details cash/bank balances are not furnished. That is, in which bank the amount shown, as on balance sheet date, was kept.

• No project to be implemented. Structured IPO.

• IPO grade -2.



EPS for the year FY 10-11 is expected to be Rs. 5.50 per share. At the lower end of the price band of 82, PE multiple works out to 15 times. Similar companies in IT networking equipments / manufacturing are presently ruling at PE of around 8 times.

Investors are advised to stay away from the issue.