Arvind Remedies: Below Average

Score: Below Average

Sanjiv Shankaran

ARVIND Remedies Ltd (ARL) has approached the primary market with a rights issue of equity shares in the ratio of one share for four held.

The rights issue has been priced at Rs 100 per share and is expected to raise Rs 14.86 crore. Shareholders may consider avoiding the issue for the following reasons.

ARL is a Rs 51 crore pharmaceutical company that makes and sells pharmaceutical formulations (drugs in a ready-to-consume form).

The rights issue aims to almost double March 2000's networth of Rs 18.36 crore. A little more than 50 per cent of the funds that accrue through the rights issue is to be invested in beefing up the marketing infrastructure of Arvind Remedies.

ARL's critical therapeutic segments are Vitamins (31 per cent of sales in 99-00), antibiotics (30 per cent of sales in 1999-2000) and anti-inflammatory (24 per cent of sales in 99-00).

The formulations market is characterised by heightened competition on the heels of the growing influence of unbranded formulations. This development has happened even as Indian pharmaceutical firms race to build size ahead of the final set of changes in the Indian patent guidelines by 2005.

In this context, ARL's plans to beef up its marketing infrastructure makes sense. The company also plans to use a significant portion of the rights issue proceeds to introduce products and bolster its research and development (R&D) arm.

The issue price of Rs 100 per share, however, appears to be on the high side in the light of the current valuation levels that exists for pharmaceutical stocks. Pharma stocks have been marked down over the last year as investors have begun to get realistic about the prospects for the industry. With no change in the operating environment for pharmaceutical companies, valuations are unlikely to improve.

Arvind Remedies has had a relatively lacklustre financial performance over the last few years. Though the company's operating profit margin has gradually moved up, it stood at a mere 10.28 per cent in 1999-2000, a level of profitability that is lower than what other mid-sized pharma companies have recorded.

With a lacklustre track record, the pricing of the rights issue, at about 23 times its 1999-2000 earnings per share (EPS) of Rs 4.24 is steep. The current market price of Arvind Remedies is about Rs 64, a considerable discount to the offer price.

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In the view of the steep price of the rights issue and increased risk in the pharmaceutical sector, shareholders may consider avoiding the rights issue.

Issue type: Rights issue for 14.86 lakh equity shares

Issue price: Rs 100 per share

Issue opened on: January 6, 2001

Issue closed on: February 10, 2001

Lead Manager: SBI Capital Markets

Listing at: Madras Stock Exchange, BSE, Ahmedabad Stock Exchange.