Investment rationale

Exports as a percentage of sales have been on a decline over the past three years — from 64 per cent of sales in 2001 to 48 per cent for the year ended March 2003.

Reliance on the domestic market exposes Surya to intense price competition, which has a debilitating effect on margins; broadly, realisations tend to be better in overseas markets.

The US and Europe are considered to be among the more attractive destinations for bulk drug exports. With drugs worth $35 billion coming off patents in the US over the next few years, the US is clearly where the action is. Frontline Indian bulk drug companies such as Cipla, Divi's Labs and Shasun, to name a few, are eyeing this opportunity.

In Surya's case, exports to the US constitute a mere 0.21 per cent of overall sales to Europe 6.9 per cent and to the Far East 34.8 per cent. The bulk drug space in which Surya operates has some rather formidable competitors: Aurobindo Pharma in semi-synthetic penicillin, Orchid Chemicals in cephalosporins and Cadila in anti-histamines, all of which have interests in the domestic market as well. Their presence should keep Surya's margins on a leash.

Surya has term loans of Rs 22.1 crore, which have been contracted at interest rates of between 14 per cent and 20 per cent. The high interest outgo could act as a drag on the bottomline.

Now, a comparison between Surya's IPO and Divi's' (in February ) is in order, as both companies derive a large portion of their revenues from bulk drugs.

The IPO of Divi's — with an exports-to-sales ratio of 90 per cent, a presence in key markets such as the US and Europe, a dividend-paying record (Surya has not paid dividends in the past five years) and an operating margin (OPM) in excess of 25 per cent (Surya's for the half-year ended September 2003 stands at 14.4 per cent) — was offered its at a more competitive price-earnings multiple than that of Surya.

Offer details

The offer, which opened on December 18, closes on December 22. Systematix Corporate Services is the lead manager to the issue. The stock will trade on the BSE and the NSE.

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