IPO Review: Aanjaneya Lifecare

AANJANEYA Lifecare is raising `110-120 crore through an initial public offer (IPO) to fund the setting up and expansion of manufacturing and R&D facilities, apart from partly funding brand building and marketing (Rs 10 crore). The company, which started operations in 2006, makes anti-malarial drugs and formulations for cough and cold. Post the IPO, it plans to focus on anti-cancer drugs and expand its presence in the branded segment.

The company's strength has been sourcing of quinine and codeine — the raw materials for anti-malarial and cough/cold formulations. While the company is among the top manufacturers of codeine, a narcotics based formulation input which is highly regulated by licences and quotas, it has also gained expertise in sourcing quinine, In fact, it is the only other company apart from IPCA Laboratories to receive WHO pre-qualification for APIs (active pharma ingredients) and formulations of anti-malarial drugs.

On the back of an acquisition last year — which marked its entry into the formulations business — the company recorded revenues of `280 crore for the 10-month period ended January 2011, as against `161 crore in 2009-10. Its raw material sourcing capability and the fact that its product segments are likely to grow at 12-15 per cent provide revenue visibility, believes Crisil Research.

However, the ratings firm says the company's corporate governance standards need further strengthening. The company has had frequent capital structure and name changes. It also states a need for improvement in the "engagement, awareness levels and board practices" of independent directors. It has graded the IPO at 1 (poor) on a scale of 5.

The stock is being offered at about 7 times its annualised 2010-11 earnings, on a post-offer expanded capital base and at par with peers. While the recent performance has been good and valuations look reasonable, its small scale of operations, limited operating history, corporate governance issues and high working capital levels (increased from 94 days in 2008-09 to 130 days in 2009-10) make the offer a risky bet.