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Amar Remedies: Invest at cut-off

Nath Balakrishnan

AN INVESTMENT can be considered in the initial public offer of the Mumbai-based Amar Remedies. Investors can subscribe to the offer at the cut-off price. The offer is being made through the book-building route in the Rs 24-28 price band. Given the current state of the market, we believe investors should also consider booking profits if the targeted rate of return is attained on the stock's listing.

Company background

Amar operates primarily in the Ayurvedic toothpaste segment, from which it derives 85 per cent of its revenues; toothpowder, a pain relieving ointment and a balm chip in with the rest. Amar intends to launch a set of 24 Ayurvedic products to address the health-, hair- and skin-care segments. The proceeds of the IPO is to be used to set up a facility at Surat for the to-be launched products and an R&D laboratory; a portion of the funds raised would also be used for marketing and branding-related activities for the new products, and for working capital purposes.

Amar has a product portfolio of 15 brands of toothpaste, of which 12 are exported and three sold in the domestic market. In FY-05, the company began exporting its products directly instead of through intermediaries, which was the operating mode to address the export market earlier.

Financials and prospects

Amar is a small outfit and ended FY-05 (the company follows a July-June fiscal) with revenues of Rs 106 crore and earnings of Rs 6.75 crore. Revenues have recorded a compounded growth of 55 per cent over a four-year period, earnings at 74 per cent.

The competitive nature of the business is manifest in the operating margin, which, at close to 10 per cent for FY-05, represents a more than 300-basis-point improvement compared to the prior fiscal. Direct exports, which accounted for Rs 5 crore in FY-05, appear to have played a key role in boosting margins. With Ayurvedic medicines increasingly gaining acceptance, largely due to their purported benefit of not having any side-effects, prospects for companies operating in this space appear good. Such medicines are gradually being accepted in the West too, throwing up exports opportunities.

The domestic market for herbal products (including of other disciplines such as Siddha and Unani medicine) is estimated at close to $1 billion, which represents a significant opportunity for a player such as Amar.

We also note from the offer document that though Amar requires Rs 21.7 crore, it would raise at least Rs 36 crore, assuming the offer goes through at the lower end of the price band. The excess funds at its disposal may be used to repay short-term loans of close to Rs 15 crore, which, in turn, would lead to substantial savings in interest costs (Rs 2 crore in FY-05).

Valuation and view

At the upper end of the price band of Rs 28, the stock would trade at about nine times its expected per-share earnings (on an expanded equity base) for FY-06. Our earnings growth estimates are conservative, as the effect of the capex should reflect higher depreciation, though we expect it to be offset in part by a lower interest outgo. The valuation level is competitive compared to peers such as Zandu, whose stock trades at close to 18 times the trailing four quarter earnings. Amar's return on shareholder funds for FY-05, at 27 per cent, is another positive. At Rs 28, the stock would command a market cap-to-sales multiple of 0.7, which, in our view, provides room for an upside.

What to watch for

Amar's toothpaste facility at Daman enjoys tax breaks, which will be partially withdrawn from FY-07 onwards. The higher incidence of taxation thereafter will compress earnings. The inapplicability of the product patent law for Ayurvedic products, which may spawn several me-too products, is also a key risk.

Offer details

Amar is offering 1.5-crore shares in the price band of Rs 24-28. Post-public issue, the promoter holding in the company will fall from close to 100 per cent to 43 per cent. Allianz Securities is the lead manager to the issue, which opened on August 25 and closes on August 31.

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