Aanjaneya Lifecare - IPO: Invest:: Business Line

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Investors with a penchant for risk can consider taking exposure in the initial public offering of Aanjaneya Lifecare. At the price band of Rs 228-240, the offer is priced at 8 times its estimated FY-11 per share earnings on a post-offer equity base, at a discount to most peers. The company's small scale of operations, lengthening working capital cycle and a limited operating history, however, may be a deterrent for the risk-averse.

Company Overview

Aanjaneya Life Care is a vertically integrated company with manufacturing and marketing capabilities in APIs (Active Pharmaceutical Ingredients) with focus on anti-malarial and finished dosage forms (FDFs) for various therapeutic segments. Its product portfolio predominantly consists of second generation quinine-based anti-malarial APIs and FDFs; it only recently marked an entry into third-generation artemisinin-based anti-malarial APIs. In the domestic market, its major customers include Arihant Pharma, Stanbury Medicare and Lyka Medica. Its exports cover contract-manufactures formulations for Wockhardt, Cipla and Glenmark.

It also has a nascent presence in branded generics through an acquired formulation unit (WHO GMP) of Prophyla Biologicals. ‘Prosils‘, ‘LivCheck' and ‘Rankorex' are some of its key brands here. Post-IPO, the company is looking to ramp up its focus on the herbal and branded generics segment. The company proposes to use the proceeds mainly to set up anti-cancer API unit and expand its R&D centre at Mahad, Maharashtra.

Prospects and Challenges

Aanjaneya's stronghold in anti-malarial segment affords it a unique position. The company's access to raw materials — codeine and quinine — used for anti-malarial and cough and cold formulations is also an advantage. The company is the second largest producer of quinine in India. As for codeine supply, which is rationed and regulated by the Bureau of Narcotics, the company's quota of up to 6000 kg per annum gives it the much-needed edge, making its clients dependant on it for API and formulation supplies. While the company doesn't have any long-term sourcing contracts with its suppliers, it has a long standing relationship with them. This has helped the company procure its raw material supplies on time, thus empowering it to pass input cost hikes to its clients.

The company plans to enter into manufacturing of new therapeutic segments such as anti-cancer APIs and niche APIs (including narcotic APIs and its intermediates). Though these are high-growth potential opportunities, the company's limited operating history and lack of firm orders peg up the risks slightly. Even so, it may take at least a couple of years before the venture begins to make meaningful contributions. Negative cash flows from operations in the last two years, driven by high working-capital cycle, too bear somewhat negatively. As for its entry into branded generics, the company currently has a distribution network consisting of more than 130 distributors, concentrated in northern India. It, therefore, may need to expand its reach aggressively to get a better grip of the market. On the whole, though the company is making the right moves, it may take a while before it begins to see benefits accruing from its many growth strategies.

Over the last two years, the company's sales and profits have grown at a compounded rate of about 172 per cent and 155 per cent to Rs 162 crore and Rs 15 crore respectively. Note that the company started operations in the middle of FY08 only. The growth, therefore, has been on a low base. Operating profit margin during the period contracted to 18.4 per cent in FY10 from 23.1 per cent in FY08. For the ten-months ended January 2011, the operating margins were higher at 21.4 per cent. Aanjaneya Lifecare proposes to raise about Rs 120 crore by issuing 50, 00,000 equity shares of face value of Rs 10 each. The issue will close on May 12.