A mountain to climb

IPO REVIEW

Alpa Laboratories' survival hinges on the success of its ambitious expansion plan.

In a sector choc-o-block with generics and contract research and manufacturing services (CRAMS) players struggling to maintain their margins, Indore-based Alpa Laboratories is expanding its multi product manufacturing unit to cater to demand from high growth, high margin products and segments such as pre-filled syringes, probiotics and lifestyle disorders.

The company, in addition to making its own branded generics, manufactures formulations for larger Indian companies and for less regulated international markets.

Jayesh Patel, the company's CEO says that the new unit will offer economies of scale and a flexibility to change product mix according to the demand, target regulated markets (post-FDA and EU approvals) and manufacture value added products such as oncology injectibles. The company currently makes about 300 formulations and has approvals for 1300 at its plant in Pigdambar, Indore. 

LONG TERM PLAY
	FY 2007	FY2008E	FY2009E
Sales	101.36	128.73	163.48
Operating profit	10.53	20.60	26.16
OPM (%)	10.39	16.00	16.00
Net Profit	6.33	15.45	19.62
NPM (%)	6.25	12.00	12.00
Shares	1.21	2.16	2.16
EPS (Rs)	5.25	7.16	9.10
P/E at Rs 62	11.81	8.65	6.81
P/E at Rs 68	12.96	9.49	7.47
Rs in crore

Expansion plan
Alpa Labs manufactures dosage forms such as injectibles, capsules and tablets which are marketed through its four divisions "" branded generics (55 per cent of sales), contract manufacturing (30 per cent), exports (11 per cent) and veterinary (4 per cent).

The company is expecting the CRAMS division that manufactures products for Indian pharma majors such as Cipla, Glenmark, Zydus Cadila and Lupin to cater to international majors once the new plant with a expanded product range becomes operational. The exports division currently supplies products to smaller and less regulated markets of Philippines, Iran, Sudan and Sri Lanka among others.

The veterinary segment that recently launched 27 animal health products in five states enjoys better margins. The company is undertaking a major expansion exercise wherein its installed capacities for five dosage forms are being enhanced.

The expansion will hike its injectibles capacity by five times and triple its capsules and ointments production. The current capacity utilisation is over 85 per cent for most dosage forms and will come to 60 per cent levels when the expansions are completed.

While the market for probiotics, a new segment, is growing by 400 per cent with few players, anti-infectives, the largest therapeutic segment in the country is the most competitive and is growing at 7-8 per cent.

High raw material cost (83 per cent of sales) is a major concern which the company is trying to fix by entering into long-term contracts and looking at new suppliers. Another risk for investors is that the expansion will only come on stream by FY09 and in an environment of thin margins and intense competition delays in implementation will cost the company dear.

Financials and valuation
While sales growth has been steady over the last five years, net profits have been erratic. Net sales have grown at an average of 27 per cent since 2003 but the company recorded a Rs 10 lakh loss in 2004, and profits of Rs 4 crore in 2006.

The sudden jump is attributed to increased margins on high value products and higher proportion of its own formulations instead of those supplied on contract to other drug makers. The company recorded earnings of Rs 6.4 crore at the net level for FY07, up 56 per cent over FY06.

At the higher end of the price band (Rs 68), Alpa discounts its FY07 earnings by 13 times, while its peers Venus Remedies, Parenteral Drugs, Ind Swift and Syncom Formulations are valued at a P/E of 12.2, 6.5, 7.6 and 4.3 respectively.

At current price band (Rs 62-Rs 68) the Rs 64 crore issue is expensive and considering that its expansion will come onstream a year and half from now, investors will be better off placing their bets on more established players.

Issue opens: July 12
Issue closes: July 17