Stock Review: SURYA Pharmaceuticals

 

 

SURYA Pharmaceuticals has entered the over-the-counter (OTC) segment in healthcare with the acquisition of US brands. The deal is likely to put pressure on its already unstable consolidated cash flow in the near-term. Also, the company's expectation of more than two-fold jump in its acquired business looks over-optimistic.

   Surya Pharma acquired OTC brands Activon, Prefron, Firston and Renewin, along with their marketing company, in an allcash deal worth $22 million (approximately . 100 crore). The deal will be funded through a combination of debt of $15 million (around . 68 crore) and internal accruals.

   These brands are for relief from joint and muscle pain and to remove scar marks. Activon is a six-year-old brand while the others are new. Activon generated sales of $8.5 million in the last fiscal and has a high margin of 32%, while the other brands are yet to add significantly to revenue.

   The management has said the sales of Activon will increase to $20 million in another year since it will also be introduced in India and other new markets.
   The US is the biggest healthcare market and it is difficult to generate similar kind of sales in other markets in such a short span. Hence, the management's claim looks too optimistic.

   Advertisement spend on Activon is around $2.5 million. A similar expenditure will also be needed for the other new brands.

   Surya has also received the marketing right for another OTC brand, Headon, a headache reliever, outside the US. Introduction of these OTC brands means more pressure on margins, at least initially.

   The company is saddled with debt. Its debt is two times its equity. In the June 2010 quarter, debt cost (interest) was 5.4% of net sales. Since the company has further opted for debt to partly finance the deal, interest cost should further eat into net margin.

   The management also expects to access major US retailers for its own OTC and FMCG products.

   But, as of now, the company doesn't have significant portfolio in these categories. Moreover, this would also require additional cash outflow for marketing these brands in the US.

   After the announcement of the deal, Surya's stock rose 5%. Though the company has grown its revenue nearly five times in the past five years, its mounting debt and higher expenditure to promote new brands in the future remain key concerns.