Brooks Labs IPO: Not worth investing

A company generally taps the equity markets or raises funds for expansion if its capacity utilisation is peaking and it foresees strong growth. Even a diversification can prompt it to seek more funds. BrooksLaboratories has no such reason for approaching the market.

Capacity utilisation of one of its units has been stagnant at 68 percent for the last four years, while utilisation for another division is less than 15 percent. Yet, the company is tapping the market with a book-building IPO (initial public offer) of between Rs 63 crore and Rs 70 crore.

[caption id=“attachment_63011” align=“alignleft” width=“380” caption=“Brooks is a contract manufacturer for domestic companies like Wockhardt, Aristo Pharmaceuticals, Zydus Cadilla among others. Michaela Rehle/Reuters”]  [/caption]

The issue, which closes on 18 August, is priced within a band of Rs 90-Rs 100.Proceeds of the issue will be used for setting up a manufacturing unit at Panoli, Gujarat.

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Brooks is a contract manufacturer for domestic companies like Wockhardt, Aristo Pharmaceuticals, Zydus Cadilla among others. The company currently has a manufacturing unit in Baddi, Himachal Pradesh, that produces formulations for a range of medicines such as antibiotics,general dry powders, injectables, ampoules, liquid vials, dry syrups and tablets.

What stands out in this public offer is that the two main promoters of the company hold 7,432,342 shares at a price of Rs 0.75. The total equity of the company before the issue is Rs 9.84 crore, or 9,836,422 shares. The remaining shares are held by family and friends of the promoters. The reason for the low average price of the promoters is that they have allotted themselves a liberal bonus just before approaching the market with an IPO. In October 2010, preferential shares were allotted at a price of Rs 10. Yet, now during the public issue, the promoters expect investors to shell out between Rs 90-Rs 100 per share.

The company has an ongoing project, for which it has only paid 10 percent of the value of the land on which it plans to set up the manufacturing unit. As per the prospectus, the unit was to be commissioned in December 2011, 10 months after completing the acquisition of land. As the entire project is equity-funded, the project can safely be said to have delayed by nearly a year.

Further, as the company plans to import machinery, it will have to export under the EPCG (Export Promotion Capital Goods) scheme. To date, the company has not exported even one unit of its output. In addition, in order to export, it will need to clear certain regulatory issues, which generally take up to a year.

The only reason the company is planning to relocate from Baddi, its current location, is that tax holiday it enjoys is coming to an end. Like most companies in the Baddi area, the company operates on a job-order (on contract) basis.

It has no branded products of its own (branded products command a premium). Other players in the tax holiday area have either shut shop or moved to a new location offering tax holidays. Brooks decided it would be more creative and resorted to tapping the equity market to shift its unit to an SEZ (Special Economic Zone) in Gujarat.

Post this issue, the company will have diluted equity capital of nearly Rs 17 crore. Given its declared audited profit figure of Rs 6.32 crore (annualised) for March ending 2011, the current pricing of the issue, at the lower end of the price band, translates into an outrageous price-to-earnings ratio of 24. Similar companies have a price-to-earning multiple in low single digits.

The issue can be safely ignored by investors.