Avoid Alpa Laboratories IPO: Arihant Cap Mkts

Alpa Laboratories (ALL), a multi-product pharmaceuticals formulations company, is open for subscription with an initial public offering, IPO of 95,00,000 equity shares of Rs 10 each for cash at a premium to be decided through the 100 per cent book-building process.

The price band for the issue is between Rs 62 and Rs 68. The issue closes on July 17, 2007.

Arihant Capital Markets report on Alpa Labs IPO

Company & Business Profile

Alpa Laboratories (APL) manufactures a range of products such as ethical drugs, generic drugs, over the counter (OTC) drugs and also veterinary drugs in various dosage forms. The company is also into contract manufacturing of various drugs for a number of domestic and international companies. Currently, has an approval to manufacture 1366 formulations.

APL mainly exports countries like Iran, Iraq, Sudan, Madagascar, Kenya, Srilanka, Nigeria Costa Rica etc. Nigeria being the main area of export. Exports contributed around 11 % of the total revenue in FY 07.

The company is currently manufacturing pharmaceutical formulations in five different product lines comprising of liquid injections, dry power injections, tablets, capsules, & ointments. It proposes to use the issue proceeds to expand their existing capacity, widen the product range and venture into segments such as pro biotins, pre biotics & pre filled syringes. They are also planning to venture into growing markets such as the lifestyle disorder segments and gynecology segments.

Investment Positive

Established Client Relationship

The company has established client relationships in domestic and international markets from whom they get orders on a continual basis. Its major domestic clients include Mac Pharma, Trimurti Drugs & Pharmaceuticals Ltd, Bharat Medical Corp etc and major international clients include Synergy Healthcare Limited, Abeer Pharmaceuticals, Kaytee Star Limited and Regional Bargains limited.

Expansion/Diversification

The company manufactures products such as ethical drugs, generic drugs, OTC drugs and veterinary drugs in various dosage forms & is planning to venture into segments like prebiotics, probiotics and pre-filled syringes. Besides, it also intends to venture into lifestyle disorder a segment which is the high margin business. These expansions & Diversifications may positively drive its revenue growth.

Concerns

Threat from competitors

The Pharmaceutical market is a very highly competitive market. The company’s revenues may get affected due to competition from low cost competitors. In case of the export markets global players are placed better & have significantly stronger market positions, better production capacities due to their large size & better financial resources. Additionally, the larger companies have a broader portfolio of business, greater resources and more experience than small companies.

High Sundry Debtors

Out of the total sales of the products manufactured by the company, sundry debtors account to approximately 42% and 52% for the financial year 2005-06 and for the period ended September 2006 respectively. In case of any default by the debtors the company’s profitability will be affected substantially.

Price volatility of active pharmaceutical ingredients (APIs)

Volatility in prices of major APIs such as cloxacillin sodium, amikacin sulphate etc can fluctuate dramatically depending upon the no of producers, their production volumes and changes in demand in the principal drug markets. APIs have a significant impact on the profitability of the company.

Valuations

The issue is priced at 19x FY07 earnings on post issue capital at floor price and at 21x at cap price.

The comparable peers are valued as follows

Company                       P/E   EPS
Parental drugs                23.8   2.8
Syncom Formulations       6.1   7.0
Venus Remedies            13.8   28.2

Recommendation

Alpa Laboratories is a small size company. Based on the valuations the issue looks expensive compared to its peers. We recommend our investors to ignore the issue.