Moneycontrol
Apr 18, 2017 12:38 PM IST | Source: Moneycontrol.com

What’s cooking in little-known Parnax Lab?

Little-known Parnax Lab has come a long way from posting losses a few years back. Can it see better days ahead?

What’s cooking in little-known Parnax Lab?

Jitendra Kumar Gupta

Moneycontrol Research

A highly-rated Dalal Street analyst, Nikhil Vora, who used to head the research team at IDFC Securities, is now making headlines picking some of the stocks himself for his newly-launched venture Sixth Sense Ventures.

What caught our attention is his recent pick: a small cap company Parnax Lab. Vora's investment philosophy revolves around picking companies that have high-quality management and ability to demonstrate growth.

The investor recently bought 50000 shares of Parnax at 64.95 a share. Post this transaction, the stock has been locked at upper circuit at Rs 70.8 a share. Since Vora is a long-term investor, it is worth taking a look at his latest pick.

The little known Parnax Lab, which is into the pharmaceutical space, has developed state of art manufacturing facilities approved by WHO (World Health Organisation) in Silvassa and Baddi in Himachal Predesh.

It manufactures finished formulations in for multinationals in India and abroad supplying to all the major clients like Pfizer, Sun Pharma, Himalaya, Wockhardt, Alkem, Cipla, Glenmark, Ranbaxy, Indoco among others.

While the business is yet to boast any credible return ratios -- return on equity is at 9 percent -- it nevertheless is showing a steady improvement with sales on a rising trajectory.

To put the numbers in perspective -  from a loss of Rs 2.8 crore in FY12 the company reported a net profit of Rs 2.15 crore in FY16 and Rs 4.3 crore in the first nine months of FY17.

EBITDA margin at 14 percent is decent but as of now a lion’s share of the same is eaten up by interest cost which is about 6 percent of the sales or Rs 4.29 crore annually.

The silver lining is that the balance sheet reveals that it started to make positive cashflows from operating activities, which should bring down debt over time.

Operationally, the company is now expanding its reach both in terms of the global footprint as well as the clients which could help in scaling up the business.

Since financial year 2013, while the capital employed in the business has risen by about 50 percent, sales have grown by a modest 22 percent - indicating that the company is yet to sweat its assets.

The improvement in topline is an indicator that in future cash flow from operations should improve, which could pave the way for reduction in debt.

Parnax had Rs 42 crore debt on an equity of Rs 27.64 crore. Thankfully interest coverage ratio, which was at 2.33 times in December quarter, has seen a consistent improvement, an indication of easing risk.

While the business has strengths in terms of strong clientele, reach, approved manufacturing facilities and management capabilities, investors will have to closely monitor how all these pieces translate into meaningful financial turnaround.

It is interesting to note that even after the recent spike in share price the stock, it is still available at reasonable 9 times its annualized earnings.
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