Shasun promoters to sell part stake to bring down debt

Written by MG Arun | Mumbai | Updated: Oct 3 2011, 08:48am hrs
Promoters of Shasun Pharmaceuticals, the Chennai-based manufacturer of bulk drugs, are looking to sell part of their stake in the company to reduce debt. Shasun has appointed investment bank Kotak Mahindra Capital to find buyers, two people familiar with the matter said. Promoters, including S Abhaya Kumar, managing director, S Vimal Kumar, director, and others, own 46.65% stake in the company as of June 30, according to a Bombay Stock Exchange filing.

Shasun had been trying to wriggle out of the losses it made after it acquired a unit of French company Rhodia Group in the UK, said a Mumbai-based investment banker, on condition of anonymity. It also has high debt on its books. This banker is not involved with the stake sale and, so, he cannot be quoted. Kotak Mahindra Capital did not respond to an email query on Friday.

Abhaya Kumar could not be reached, but his personal assistant said over phone that Kumar would not want to comment on market speculation. Vimal Kumar directed the queries to the companys chief financial officer S Hariharan. Hariharan did not respond to calls made to his office phone.

According to the banker quoted above, valuations in the pure API (active pharmaceutical ingredients) business come to about seven to eight times a companys earnings before interest, taxes and amortisation or Ebitda. Ebitda or operating profit indicates the financial health of a company. This would mean Shasuns API business, with an Ebitda of R38.62 crore in FY2010-11, is valued between R270 crore and R310 crore.

Combined with the company's other businesses like contract manufacturing, it would be valued close to Rs 400 crore, the banker added.

In its first acquisition for a global footprint, Shasun bought the Dudley, UK-based, loss-making contract manufacturing unit of Rhodia in January 2006. The unit, now Shasun Pharma Solutions, acts as an outsourcing partner for other large companies in the US, Europe and Asia for research and manufacturing. Shasun Pharma Solutions had revenues of 48 million pounds by 2008, but revenues fell since then, according to a report in the UK-based The Journal on January 26 this year. In 2009, the firm shut its sister plant in Annan in Scotland to concentrate production on the North East. It made a loss of 9.9 million pounds in the year ending March 2009, and 2.2 million for the year ending March 2010, the report added. The Journal is a Newcastle-based newspaper focused on news and developments in North East England.

N Govindarajan, Shasun's CEO who was instrumental in forging the deal with Rhodia, quit the company to join rival Aurobindo Pharma as CEO of its API operations in October 2010.

Companies that have been traditionally making APIs are either trying to graduate into more value-added formulations business or may look at exiting such businesses altogether, say industry analysts. India is ahead of China in complex intermediates, but China has a cost advantage in base or lower-end chemicals, says Sujay Shetty, a partner at consulting firm PricewaterhouseCoopers. The prices of APIs are highly volatile, making the business challenging. He did not comment specifically about Shasun.

Shasun shares on Friday closed on the Bombay Stock Exchange at Rs 65.05, down 2.47%. The company has a market capitalisation of Rs 315 crore.

Indian drug-makers like Aurobindo, Hetero Drugs and Divi's Labs specialise in APIs. Some API makers have moved up the value chain into formulations, as returns from APIs are not consistent, says Sarabjit Kaur Nangra, vice president, research at Mumbai-based Angel Broking. Bangalore-based Matrix Laboratories and Hyderbad-based Aurobindo are examples.

China is a serious competitor, since it has large-scale facilities and is good at process, she added.

Shasun, set up in 1976, reported a net profit of Rs 26.62 crore on a consolidated revenue of Rs 839.65 crore during 2010-11. It has Rs 218.94 crore debt.

Most companies in the API business tend to expand through debt and have sizable capex as part of growth plans, said Navroz Mahudawala, managing director of Candle Partners, a boutique investment banking firm. Typically, balance-sheets are leveraged to levels of 2:1, and in some cases, even higher.

Ratings agency Fitch Ratings said on August 28, 2011 that liquidity for medium- to small-sized pharma companies will remain a concern. It added that profit margins have been constrained by an increase in costs, coupled with competitive pressures. However, the decline has been partly off set by margins on new product launches.