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Nath Balakrishnan

AN INVESTMENT can be considered in the IPO of Mangalam Drugs and Organics, which makes bulk drugs, intermediates and specialty chemicals. At the offer price of Rs 22, the stock would be valued at about six times its expected per share earnings for FY-05 and at about nine times the earnings on the post-offer equity for FY-06.

Unlike some of the recent IPOs that have been priced stiffly, thereby leaving investors with little to gain on listing, Mangalam's offer does appear to offer scope for appreciation. However, considering the prevailing market levels, investors should consider the possibility of flipping the stock if it lists at a significant premium to the offer price.

In the bulk drug space, Mangalam operates in the anti-malarial and analgesic therapeutics segments; this contributed close to 60 per cent of revenues for the nine months ended December 2004, and dyes and intermediates, aluminium chloride and specialty chemicals the rest. Funds raised through the public offer would be deployed to increase the bulk drug capacity and ramp up the scale of aluminium chloride operations. Mangalam also intends to use part of the proceeds to repay loans that have been contracted at high rates.

Admittedly, the bulk drug business has neither the visibility nor the profitability of being in the formulations (medicines in dosage form) space. Operating margins for this segment were 12 per cent for the nine months ended December 2004. This, too, is offset by the lower margins of the other businesses, as a result of which margins for the company have been in the 6-7 per cent range over the past three years; however, in this period, margins have been trending upwards incrementally.

As the bulk drug business accounts for a greater share of Mangalam's business, margins could improve further. We also note that Mangalam has on its client roster established names such as Cipla, Nicholas Piramal, Indoco Remedies and Bayer Pharmaceuticals, which we view as a positive. Further, as contribution from exports scale up (at 10 per cent of sales), it should aid in margin improvement.

As Mangalam has contracted loans at high rates, its interest payout has been in excess of 40 per cent of operating profits over the past four years (except in FY-04, when it was 35 per cent). Repayment of such loans should bring about a reduction in interest costs, which should act as another driver of earnings growth.

We note that a significant portion of Mangalam's revenues are accounted for by the supply of anti-malarial bulk drugs; drugs belonging to this class are under the purview of price control in the domestic market and any lowering of prices will impact Mangalam negatively. If crude price continues to rule at higher levels, it would have an inflationary effect on input costs and squeeze margins.

The offer, which opened on April 19, closes on April 26. A minimum of 50 per cent of the total offer of 65 lakh equity shares has been earmarked for retail investors who apply for shares in value not exceeding Rs 50,000. Khandwala Securities is the lead manager to the issue.

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