The scrip of a little known pharma company of 1995 vintage, Plama Laboratories Ltd, which was languishing at just Rs 3.50 in early this year, has suddenly made strides in the past three weeks. For more than two weeks continuously, Plama counter was "buyer- packed" and, consequently, the scrip hit the circuit almost every day. Indeed, of late, there is a strong upward current in the counters of pharma scrips. But, the recent uptrend in Plama scrip price appears to do more with certain developments behind the scene than the general market trend.For starters, the Bangalore-based Plama was originally promoted by a 32-year-old commerce graduate, PMA Razak, and his associates during the stock boom in 1992 with the object of setting up a bulk drug project. After incubating for nearly three years, the promoters finally brought the project to light with their maiden public issue during the primary market boom in January 1995. As per the offer document, Plama's 38 tonnes per annum bulk drug project at Mangalore, appraised by none other than IDBI at Rs 9.20 crore, was to start operations by April 1995.
IDBI and SBI had sanctioned Rs 1 cr and Rs 3 cr respectively as term loans towards the project. Of Plama's equity of Rs 5.70 cr, promoters were to subscribe to Rs 2 cr (35 per cent), KSIIDC Rs O.30 cr (5 per cent), ICICI Mutual Fund Rs 0.20 cr (3.5 per cent), Kothari Pioneer Mutual Rs 0.24 cr (4.2 per cent), 20th Century Mutual Rs 0.24 cr (4.2 per cent), Global Trust Bank Rs 0.15 cr (2.6 per cent), KSFC Rs 0.10 cr (1.75 per cent), NRIs Rs 0.72 cr (12.6 percent) and Indian public Rs 1.75 cr (30.7 per cent).
The public portion was oversubscribed 13 times and, of the 8075-odd applicants, 1200 people got allotment. Reflecting partly the initial public issue sentiment, the scrip got listed in April 1995 at 60 per cent premium to the offer price of Rs 10. Nevertheless, as most of the bulk investors resorted to profit booking on listing, the scrip started marching southwards. With the project failing to keep up its schedule, the scrip slipped below par in October 1995. The relentless southward movement in the share price did really indicate that all was not well with company.
Finally, it was announced in September 1996 that another Bangalore-based closely-held pharma company, Strides Laboratories Ltd, was interested in taking over Plama. Interestingly, after the announcement of the merger ratio, that is, 1 Strides Lab share for every 8 Plama Lab shares, the scrip hit its historical low of Rs 1.25 in 1997! After languishing for more than three years below par, the Plama scrip started looking up since the beginning of the current year. Starting from around Rs 4 in January, Plama has hit its historical peak of Rs 55.55 this month! How come the same scrip which was going abegging at Rs 1.25 two years ago even after hearing the `merger news' has shot up to such a dizzy height only now, that too even before the merger takes place?
Undoubtedly, Plama's `present promoters' have a better track record. And, under their control, for the first time in its history, Plama has reported a profit of Rs 1.47 crore in the 18- month period ended March 1999. However, this gives an annualised EPS of only Rs 1.72 which, coupled with Plama's accumulated loss of Rs 3.63crore, may not justify Plama's current market price of over Rs 50. According to marketmen, the recent spurt in Plama share price was largely influenced by Morgan Stanley's investment into 8.5 lakh shares of the amalgamating company, Strides, at a price of Rs 300 per share! If Strides is worth Rs 300, Plama should be Rs 37.50, as every 8 shares of Plama will be exchanged for 1 share of Strides in the month of November.
Plama's present market price of around Rs 52 is thus equivalent to Rs 408 of a Strides scrip! Can such a price be justified for Strides?
The professionally managed Strides expects a significant growth in the coming years as its Rs 62 crore "world class" soft gelatin capsule project has become operational since July last year. For fiscal 1999, Strides posted a consolidated net profit of Rs 9.13 crore against the consolidated equity capital of Rs 8.36 crore. At the end of fiscal 2000, Strides equity will stand at Rs 13.83 crore. If the present market discounting, that is the Price-Earning Multiple, of Indian-controlled integrated pharma companies like Sun, FDC, Lupin and Nicholas Piramal is anything to go by, to justify a market price of over Rs 400, the Strides should have a historical EPS of at least Rs 13. In other words, only a bottom line of Rs 18 in fiscal 2000 can justify a price of Rs 400 for the scrip. Will Strides earn that much in the current year? A growth of almost 100 per cent over last year certainly looks remote in the current year.
From another angle, if the company's profitability were to improve so much in the current year, how come Strides issued 43.63 lakh shares to its "venture capital investor" at the rate of just Rs 55 only last year? As a matter of fact, in the proposed equity of Rs 13.83 crore, the promoters and collaborators will hold only 30 per cent and 6.4 per cent respectively. The holding of the venture capital investors is the largest chunk at 35.3 per cent! What's more, the venture capital investors' average cost of holding could work out to less than Rs 50 per share! Hence, the market price of Strides scrip in the year 2000 is going to be determined more by the mood of one foreign venture capital investor, the Schroder group, than the company's 7500-odd Indian shareholders!
[E-mail feedback to: investar@bol.net.in] (Arranged by INVESTAR -- The Aarthik News & Research Syndicate)
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.