Parabolic Drugs a good bet for long-term play

Shares of Chandigarh-based Parabolic Drugs - a manufacturer of active pharmaceutical ingredients, or APIs, which got listed in July 2010 - is trading at half its listing price. The stock appears to be bottoming at around the current levels of 30-32. The company earns 60% of its revenues from its business in India and the rest from exports, predominantly to Europe, Turkey and the Middle East. Parabolic currently earns 65% of its revenues from cephalosporin APIs, 25% from penicillin and the rest 10% from formulations.

Parabolic has a couple of drivers fuelling its growth. Its sales have grown 30% (on a trailing four-quarter basis) and its operating margins have been improving with every passing quarter. It has recently commissioned its non-betalactum facility to manufacture high-margin APIs for lifestyle drugs. It will also help the company make inroads into more regulated markets, including the US. The facility is likely to generate 50-75 crore of revenues in FY13 and 200 crore (bulk of its capacity) is expected to accrue in FY14.

While Parabolic has a debt of 400 crore, it has managed to bring down its debt equity ratio to a manageable 1.3 from its pre-IPO level of 3. Parabolic Drugs expects to close the current fiscal with net sales of 800 crore - a growth of 20% over a year ago and expects to grow at this rate over the next three years.

In three years, the company intends to ramp up exports to constitute 60% of its revenues. Over this period, the management plans to change the revenue mix to earn 40-45% from cephalosporin APIs, 20-25% from non-betalactum APIs, 20-25% from finished dosages and the rest from penicillin.

The stock is trading at 3.3 times of its earnings for the last four trailing quarters. These may appear very attractive valuations. However, most API players have suffered heavily on bourses. Aurobindo Pharma is down 67%, Orchid Chemicals 54%, Nectar Lifesciences 40% and Ind Swift Labs has dropped by 22% in the past one year. There are better growth-oriented API companies available at similar low valuations. Investors interested in this stock must invest with a long-term horizon of at least three years.