Financial Daily from THE HINDU group of publications
Sunday, Jun 26, 2005
Markets - IPOs
Nectar Lifesciences: Invest at cut-off
Mr. Sanjiv Goel (centre), Managing Director, and senior members of the management.
Nectar is a Rs 230-crore bulk drug company with a presence in the anti-infective therapeutic category. Its product portfolio comprises semi-synthetic penicillin and cephalosporins in both the oral and sterile forms. Nectar is in the midst of an expansion programme that involves setting up another cephalosporin unit and one to make non-antibiotic active pharmaceutical ingredients.
Nectar also has a wholly-owned subsidiary, Chempharma, which is based in Sri Lanka. The unit enjoys Customs and income-tax benefits and its product (API intermediates) is consumed almost wholly by Nectar. The facility, which led to cost-savings for Nectar, also contributes significantly to the profitability of the consolidated entity.
The proceeds from this issue are to fund the construction of a formulations facility at Baddi in Himachal Pradesh, and to set up a sterile cephalosporin unit and an R&D centre near the company's existing facility at Derabassi in Punjab.
The therapeutic space in which Nectar operates has such established players as Aurobindo Pharma, Lupin and Orchid. Success in this business is a function of scale, a tight control over costs and an integrated business model. Pricing is driven by global trends and the market is highly competitive.
In the cephalosporin segment, a presence in new-generation products is preferred, as this is an area showing higher growth compared to older-generation products. Further, within this market, realisations for sterile forms tend to be generally higher as they call for a greater degree of expertise in manufacturing. Considering Nectar's long-standing presence in this therapy area, we believe that the company can capitalise on the emerging growth opportunities in this space.
To diversify, Nectar plans to focus on a portfolio of non-antibiotics that comprise cardiovasculars (statins and prils) and anti-histamines (fexofenadine). Though the effect of the expansion programme is likely to manifest only in FY-07, these categories still present opportunities for Nectar even if a few other players have a headstart.
The facility coming up at Baddi is for cephalosporin-based formulations. With Baddi enjoying a tax holiday, it opens the possibility of contract manufacturing in the domestic market. As Nectar intends to supply formulations to its customers from this facility, we believe it would impart an upward bias to margins compared to the supply of only APIs.
Nectar's Sri Lanka facility has led to considerable savings on costs and, as a result, pushed up operating margins to 17.5 per cent in FY-05 compared to 13.5 per cent in FY-04.
At the lower end of the price band of Rs 200, the stock would trade at a multiple of about 15 times its FY-05 per share earnings on an expanded equity base; at the upper end of the band, it would trade at price-earnings multiple of 18. This valuation is low compared to those commanded by its peers in the domestic market. The return on net worth has been on a steady climb since FY03; that figure stands at an attractive 31 per cent for FY05.
Weakening price trends in some of the key products manufactured by Nectar, a downward revision of product prices effected by the National Pharmaceutical Pricing Authority in the domestic market, and the political and currency risks of operating in Sri Lanka are the key downside possibilities to our recommendation.
On offer are 38.7 lakh shares in the Rs 200-240 price band. The offer, which opened on June 22, closes on June 28. ICICI Securities is the lead manager
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