Risky Ride

Given Aanjaneya Lifecare's presence in highly commoditised, low-margin segment and steep valuations, investors can give it a miss

Maharashtra-based Aanjaneya Lifecare is coming out with an initial public offering of around five million shares to raise around Rs 120 crore. Post offer, the share of promoter group will come down to 60.2%. Of the total net proceeds, the company will use over Rs 90 crore for setting up facilities and blocks at Mahad in Maharashtra, while Rs 10 crore would be utilised for product marketing and registration expenses in the international market.

Given the company''s presence in the highly commoditised, low-margin segment of active pharmaceutical ingredients (API) and steep valuations, retail investors can give it a miss.

Incorporated in 2006, Aanjaneya, a subsidiary of Abaha, is engaged in manufacturing and marketing of APIs (active pharmaceutical ingredients) with focus on anti-malerial and finished dosage forms (FDFs) catering to various therapeutic segments. The company aims to be an integrated player through bulk drug manufacturing, intermediate drugs and finished dosage forms. To achieve this, it acquired assets of Prophyla Biologicals at Mulshi, Pune in 2010. Prophyla Biologicals is engaged in the business of formulations and FDFs contract manufacturing.

Aanjaneya''s portfolio consists of second and third-generation anti-malarial APIs and FDF''s. It plans to enter various other therapeutic areas such as pain management, hormone replacement therapy, anti obesity and others. It also supplies contract manufacturing services to Wockhardt, Cipla and Glenmark. The company has a few products in branded segment too. More than 92% of the company''s business comes from the domestic market.

For the first 10 months ended January 2011, the company has reported net sales of Rs 280 crores and net profit of Rs 31 crore. These numbers include the contribution from its acquisition, Prophyla Biologicals, in March 2010. During FY08-10, the company''s net sales grew at a compounded annual growth rate of 175% and the net profit shot up at a CAGR of 155%. However, during the same period, its earning per share has dropped from Rs 130 to Rs 30, as the company increased it equity by almost more than 150% in FY09.

Operating margin of the company for first 10 months ended January 2011 was 21.4% and net profit margin was Rs 11.1%.

However, the concern is the sharp rise in the receivables. Receivables have gone up by five times in the 10 months ended January 2011. During the period, receivables-sales ratio rose to 39% from 22.5% in FY10. According to the management, this is due to their entry in the branded products for which they have to give credit to retailers. Capital work in progress has also gone up by eight times to Rs 37.2 crore. Total debt as on January 31, 2011 stood at Rs 139 crore. Post-issue, the debt to equity will be 0.5.

At the upper end of the price band, the company seeks a P/E 9.5 on the post-IPO equity. API player such as Indoco Remedies, Ind-Swift labs and Parabolic Drugs, a recently listed API manufacturing and marketing company, are trading at multiples in the range of 3 to 10.7. Given this, Aanjaneya looks expensive. Investors can skip the IPO.

Jwalit Vyas