The Hindu Business Line : Anu’s Laboratories

Given its small size and the competitive scenario of the pharmaceutical bulk drugs industry, the Initial Public Offer (IPO) of Anu’s Laboratories may be suitable for investors with a good risk appetite.

The company makes raw materials for drugs — Active Pharmaceutical Ingredient (API) intermediates. Anu’s Labs sales have grown at the rate of 40 per cent annually for the past five years — helped by the introduction of two products in 2004. Similarly, operating profits have grown by over 60 per cent annually in the same period, with the ramp up in two high-margin products in 2005 and 2006.

Going forward, Anu’s Labs may be able to improve its margins in the bulk drugs industry as it augments capacity. It may also be able to increase presence in Contract Research and Manufacturing Services (CRAMS) space and maintain a fair pace of growth due to a dominant position in its portfolio of products.

At the upper end of its offer price-band (Rs 210), Anu’s Labs is available at a moderate valuation of ten times its annualised 2007-08 earnings per share on its pre-IPO equity base of 82.56 lakh shares. However, given the risks involved, competitive industry and anticipated intervention by government, pricing at the lower-end of the price-band may offer greater comfort.

Business profile

Although a bulk of the 33 manufactured products (such as DCFA, Cis-Lactum and Methyl-4) offer steady growth rates, Anu’s Labs enjoys strong customer base consisting of both large domestic and international firms.

The established client-relationships provide some assurance on earnings. The company does not enter into long-term contracts for the API business, which it believes restricts ability to bargain for better prices.

This leads to lumpy quarterly earnings in the short-term, but may lead to better control over margins in the long term. The company also has six important products in the pipeline that could boost sales, when introduced.

Anu’s Labs may close this year with an increase of 25-28 per cent in sales and profits, based on the nine-month performance.

Anu’s Labs has maintained superior operating margins at around 20-22 per cent for the last 20 months as its tie-up with Nitya Laboratories, a promoter group company, has paid rich dividends. Nitya supplies Anu’s two significant products by way of contract manufacturing.

While Anu’s Labs exports 20 per cent of its sales currently, which makes it vulnerable to rupee-dollar volatility, it also imports raw materials that account for 70 per cent of the export revenues.

If this ratio is maintained, it might provide a natural hedge against rupee appreciation.

The risks to earnings arise from the substantial scaling up of size planned from present levels, product (three products formed 77 per cent of sales) as well as client concentration (top three clients account for 68 per cent revenues).

Future plans

The increase in debtor days on both domestic and export sales, by three times in the recent nine month period, is a concern.

Anu’s Labs plans to utilise the IPO proceeds mainly for forward integration.

This would be done by setting up a manufacturing plant for finished bulk drugs (which have higher margins) at Vizag.

It also aims to fortify its presence in the niche Contract Research and Manufacturing space by setting up a trial plant (processing small quantities of drug materials) in Vizag, and also partially meet long-term working capital requirements.

The full benefits of the planned capex are only expected to kick in after April 2009, when both the bulk drug plant and the CRAMS plant would be ready. Investors have to brace for a significant equity dilution of 31.6 per cent, post-offer.

Anu’s Labs’ offer price places it in-line with like-sized peers operating in the API and bulk drug industry.

However, the company has good growth prospects, superior operational as well as profitability parameters, compared to peers and a strong product pipeline.

The high-margin CRAMS business (which will require additional investments), if it delivers, may hold potential, as well. The offer opens on May 12 and closes on May 15.

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