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Nath Balakrishnan

INVESTORS may consider investing in the rights issue of Bal Pharma being offered at Rs 30 per share.

The issue is being made in the ratio of three shares for every five shares held and the proceeds would be used to part-finance the company's expansion plans, which includes setting up a bulk drug plant and a formulations (medicines in finished form).

Investments need to be made with a medium-term perspective, as the benefits of Bal's expansion plan are likely to flow in from FY08.

However, investors may also consider offloading a part of their holdings of the stock at current levels, as valuation, at about 18 times its expected per share earnings for FY06, is rich.

There is also the possibility of the stock price trending downwards once the additional shares through the rights issue are available for trading.

Company profile

A small company with a turnover of about Rs 60 crore, Bal Pharma has a presence in both the bulk drug and the formulations segment.

For the year-ended March 2004, the company derived about 60 per cent of its revenues from branded formulations and generics; exports accounted for 18 per cent of sales. In the domestic market, its competitors include Dr Reddy's and Cipla.

Business prospects

The expansion plan is aimed at targeting the lucrative exports markets in the US and Europe.

Though this initiative is commendable, the benefit of the expansion plan, which should manifest fully in 2007-08. We believe scaling up will remain a key challenge for Bal in the near-to-medium term.

Bal also intends to focus on contract research and custom synthesis to capitalise on the outsourcing opportunities in this area, which are areas that hold good growth potential.

In the domestic sector, Bal Pharma has a presence in the fast-growing therapy areas such as anti-diabetics and cardiovasculars.

Typically, formulations addressing this area fall outside the scope of price control and offer scope for better realisations. Margins have continued to remain in the 11-12 per cent band over the past four years; as developed market initiatives kick in gradually, they should see an upward bias. The formulations facility is being set up in Himachal Pradesh, which provides for tax breaks. With the transition to MRP-based excise duty from January, opportunities for outsourcing from such locations have sprung up. However, expect the benefit of any such deals to take shape in a couple of years from now.

At the rights issue price of Rs 30, the stock would trade at a multiple of about 11 times its expected per share earnings for FY06. At a dividend of 15 per cent (declared for FY04), the yield, at 5 per cent, should offer some downside cushion.

Offer details

A total of 39.18 lakh shares are being made available on a rights basis at Rs 30 per share.

Karvy Investor Services is the lead manager to the issue, which opened on April 27. The issue closes on May 26.

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