Avoid Brooks Labs IPO, say experts

Sunil S Matkar

Brooks Laboratories , a pharmaceutical contract research and manufacturing services company, is looking to raise Rs 63 crore through its initial public offering, which remains open for subscription for August 16-18, 2011.

The company has a well-equipped manufacturing unit at Baddi, Himachal Pradesh with annual installed capacity of 3 crore injections, 12 crore tablets and 1.2 crore dry syrups. It has catered to 158 customers as on March 2011.

Experts believe the IPO does not offer anything meangingful or exciting for investor. The research firm SMC has given weak rating to the IPO.

IPO Analyst Arun Kejriwal said one should not subscribe the issue as it has expensively priced. "Its price-to-earnings multiple comes to 41-42 times (post issue), which is quite high as compared to listed peers," he said.

"This company has not chosen to have any roadshow and like in all such companies is extremely overpriced," he added.

Investment Advisor SP Tulsian too advised avoiding the issue, citing the issue is very expensive and also not exciting at all.

"With networth of Rs. 19 crore and debt of Rs. 9 crore, as of 31st March 2011, company is expecting a market cap of Rs. 162 crore on listing (at Rs. 100 per share), which is 3 times of sales. The PE multiple at the lower and upper end of price band of Rs. 90 and 100 works out to 13 times and 14 times respectively, which is very aggressive given the small scale of operations and annual revenues of barely Rs. 50 crore for the company. Pharma peers of similar size currently trade in PE multiples of an average of 5 times, on the stock exchanges," he reasoned.

In the year ended March 2011, Brooks reported a 17% growth in revenues to Rs 53.20 crore over the previous year. The net profit for the same period went up 32.6% to Rs 6.9 crore. Secured loans declined 26.5% in FY11 to Rs 8.7 crore.

SMC said, "The company has a proven past track record in supplying pharmaceutical formulations and has WHO-GMP approved manufacturing capabilities. The company's profitability has also witnessed a gradual improvement through increased focus on manufacture of niche and differentiated products. However, the small scale of operations with a single manufacturing facility and a highly competitive domestic contract manufacturing industry with presence of similar sized players as well as large established players may result in heavy pricing pressure. Further, the Greenfield nature of the project together with substantial time required for stabilization makes the project execution risks higher."
 
Brooks plans to set up a new manufacturing unit at JB SEZ Pvt Ltd, Panoli, Gujarat for manufacturing various pharmaceuticals formulations to the tune of Rs 51.8 crore. It also needs Rs 5 crore for long-term working capital.

sunil.matkar@network18online.com