IPO Sales Memo - SMS Pharmaceuticals Limited - Finapolis

PF/IPOSM/05022007/111 05 February 2007
SMS Pharmaceuticals Limited
Company Background
SMS Pharmaceuticals Limited is a leading producer of Active Pharmaceutical Ingredients and
pharmaceutical organic intermediaries. The company, mainly engaged in the manufacturing of bulk
drugs, was incorporated as S.M.S. Pharmaceuticals Private Limited in December 1987. It became a public
limited company in November 1994, with its name changed to the present name in April 2004.
7 natural persons, 2 business entities and 1 HUF were holding 80.59% of the share capital of the
company at the time of filing of the Red Herring Prospectus for this public issue. The promoter list
includes Ms. Hima Bindu Potluri, Mr. Ramesh Babu Potluri, M/s Gulf Pharmaceutical Industries, Mr. T V V
S N Murthy, M/s Potluri Hire Purchase & Finance Pvt. Ltd., Ms. Annapurna Talluri, T V V S N Murthy
(HUF), Ms. T. SUdeepthi, Mr. Vamsi Krishna Potluri, Mr. Trilok Potluri.
The company is mainly engaged in the manufacturing bulk drugs like Ranitidine HCl, Sumatriptan
Succinate, Sildinafil Sitrate, Omeprazole Magnesium, Ramipril, Almotriptan maleate, Gemcitabine HCl,
Imatinib Mesilate and their intermediaries. The company has also started producing ACE Inhibitors like
Perindorpil Erubamine and Imidapril and anti-cancer Capecitabine and Bicalutamide. It has been
adjudged as the largest producer of Ranitidine HCl and its intermediaries in the world.
The company has four manufacturing facilities (including one pilot plant) and one exclusive basic
research facility , all situated in and around Hyderabad, Andhra Pradesh. It has proposed a bulk drug
facility with FDA and Non FDA blocks. With the professional and skilled workforce, research and
development expertise and ever-expanding array of API’s and bulk intermediaries, the company aims at
developing improved new products.
COMPETITIVE STRENGTHS
Business Overview
Some of the main business strengths of the company that enable it to remain competitive are:
(i) Company manufactures wide range of API’s and intermediaries with its focus on products going off
patent and offering higher realizations.
(ii) Contract manufacturing / contract research is carried, based on the cost effective processes
developed by the company to manufacture various products through process innovation.
(iii) Multi-purpose and multi-product production equipments and facilities of the company are used by it
to produce a variety of API’s and intermediaries.
(iv) Long term working relationship with customers.
(v) Technical assistance provided to Beximco a company based in Bangladesh for setting up API
manufacturing facility at Beximco’s premises, under a collaboration with it.
Industry Overview
Indian pharmaceutical industry has evolved from being almost non-existing in 1970s to being the
prominent provider for almost 90% of country’s pharmaceutical needs. The industry output has increased
at a CAGR of 14.11% in last 10 years. Now highly organized, Indian pharmaceutical industry is estimated
to be worth $6.4 billion, growing at 8% to 9% annually, to about $25 billion in 2010. Also, the industry
ranks very high in the world, in terms of technology, quality and range of medicines manufactured. From
simple headache pills to complex cardiac compounds, almost every type of medicine is now
manufactured indigenously.
Indian pharmaceutical sector is highly fragmented with more than 20000 registered units. Leading 250
companies control 70% of the market with severe price competition and government price control.
Although India accounts for 16% of the world population, sales of pharmaceuticals are just 1.8% of the
global sales in terms of value and 8% in terms of volume. It however ranks 4 th in volume and 14 th in
value terms.
Report prepared by Atul Stanley Hermit - atul.hermit@karvy.com Phone No. - 23312454 Extension - 304

Management Organizational Structure
Board of Directors
Chairman & Managing Director
Vice Chairman & Joint Managing Director
GM Marketing
GM Purchase & HR
VP Technical & Operations
GM Finance
GM Research Centre
Manager
Marketing USA,
Canada, & Latin
America
Manager
Marketing
Europe
Asst. GM
Administration
Senior Manager
Raw Materials
Senior Manager
Projects
GM Unit I
– Khazipally
Asst. GM Unit II
– Bachupally
GM Unit III
– Jeedimetla
Manager Finance
Manager
Secretarial
Manager
Accounts
Manager
Analytical
Development
Manager
Product
Development
Manager
Marketing India,
Bangladesh, &
Documentation
Manager
Marketing Rest
of World
Mr. Ramesh Babu Potluri,
Managing Director
Asst. GM
Miscellaneous
Purchase
Senior Manager
Job Works
Board of Directors of Company
Chairman and
Mr. T V V S N Murthy, Vice Chairman and
Joint Managing Director
Mr. A. P. Rao, Non Executive and Independent
Director
The Competition & Clientele
Dr. Mihir K. Chaudhuri, Non Executive and
Independent Director
Dr. B. Manoranjan Choudary, Non Executive
and Independent Director
Mr. K. Subramanyeswar Rao, Non Executive
and Independent Director
Mr. Vinod Goel, Nominee Director (EXIM Bank)
The major competitors of the company, with respect to particular product segments, are:
• Saraca Laboratories
• Dr. Reddy’s Laboratories
• Neuland Laboratories
• Natco Pharma
• Aarthi Drugs
• Shipa Medicare
• Benzochem
• Rakshit Drugs
• DSM
• Matrix Laboratories
• Cipla
• Cadila Pharma
• Hetero Drugs
THE CLIENTELE
International
• Scino Pharma Kushan Biochemical Ltd.
• Spanchem S. L.
• Helm De Mexico S. A.
• Chemo S. A.
• Tektrade Ltd.
• Albion Laboratories Ltd.
• Beximco Pharmaceuticals Ltd.
• Mione Trading Ltd. – Bulgaria
• Ap Dept. Teva Pharm USA
• PKK Chemical Marketing WLL
Domestic
• Ranbaxy Laboratories Ltd.
• Cadila Pharmaceuticals Ltd.
• Orchev Pharma Pvt. Ltd.
• Disha Enterprises
• Dabur Pharma Ltd.
• Nueland Laboratories Ltd.
• Torrent Pharmaceuticals Ltd.
• Shilpa Medicare Ltd.
• Unimed Technologies Ltd.
• Unique Pharma Labs

.
The key performance figures for SMS Pharmaceuticals Limited are as follows (in Rs. Crore):
6 months
ended 30th
Sep. 2006
Year ended
31st March
2006
Year ended
31st March
2005
Year ended
31st March
2004
9 months
ended 31st
March 2003
12 months
ended 30th
June 2002
Total Income 97.63 133.48 121.21 118.36 51.95 79.69
EBIDT 21.11 24.14 19.77 18.72 8.84 12.65
PAT 10.6 8.51 8.45 7.49 2.33 5.92
Total Assets 170.13 159.27 147.44 123.41 96.16 93.33
Total
Liabilities 108.35 110.41 105.69 87.53 64.44 54.18
Net Worth 61.78 48.86 41.75 35.88 31.72 39.15
Dividend (in
%) 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%
Adjusted EPS 16.12 * 20.75 20.6 18.28
RONW (in %) 17.16% 17.41% 20.23% 20.88%
* Non Annualized
Company Financials
Capital Structure
Details
Nominal Value (in Rs.)
Existing Equity Capital (7,423,000 shares @ Rs. 10 / share) 74,230,000
Present Issue (2,577,000 shares @ Rs. 10 / share) 25,770,000
Equity shares after the issue (10,000,000 shares @ Rs.10 / share) 100,000,000
Corporate Strategy
Key elements of the business growth strategy for SMS Pharmaceuticals Limited are:
Proposed marketing set-up – The company intends to focus on increasing its sales in regulated
markets such as those in US and other European countries. Also, it will continue to look for opportunities
for supply of its advanced intermediates to large companies, on a mutually beneficial proposition.
Upgrade existing manufacturing facilities – Company aims at upgrading its existing facilities to
make these compliant with international regulations like US FDA. This would assist in greater
acceptability of the company’s products in foreign markets.
Establishment of new facilities – Company aims at establishment of new facilities to enhance the
existing manufacturing capabilities while also adding to the production capacity.
Reduction of operational costs – Company wants to remain a cost competitive entity, and will be
focusing on the reduction of its operational costs to increase its competitiveness.
Improving manufacturing technology – Company aims at achieving best productivity, energy
efficiency and cost effectiveness by improving its process technology that has been developed in-house.
Enhancing employee skills & efficiencies – Company conducts periodic training for all its technical
staff to upgrade and hone their skills. Further, the management provides good working conditions and
encouragement to innovative ideas to spurs the employees to excel in their work area.
Reducing environmental pollution – Company is committed to providing a safe, clean and healthy
environment and continuously strives to minimize generation of waste water and air emissions thereby
preventing pollution. The company does this by using cleaner technologies, reducing use of natural
resources, and reusing & recycling wastes.
More focus on research and development – Research and development being the key to the future of
the pharmaceutical industry, as well as the basis for the increase in life expectancy and health all over
the world, the company plans to: develop non-infringing synthesizer for its API’s and intermediaries;
conduct basic research for new chemical entities; customize synthesis (where synthesis route is
developed by it) & otherwise contract synthesis; and synthesis of special chemicals.

Objective of the Public Issue
SMS Pharmaceuticals Limited intends to utilize the proceeds of this public issue for:
(i) Setting up of facilities for manufacturing Active Pharmaceuticals Ingredients (APIs). (ii) Meeting
requirements of additional working capital. (iii) Meeting the expenses of this issue.
IPO Snapshot
Type of issue
100% Book Building Issue
Price
Rs.360 – Rs.380
No. of shares 2,577,000
Issue Size
Rs.92.77 Crore – Rs.97.93
Issue Opening 05, February 2007
Issue Closing 08, February 2007
Face Value
Rs.10
Application Size
15 equity shares and in multiples of 15 equity shares each
Book Running Lead Managers
UTI Securities Limited
Registrar To The Issue
Aarthi Consultants Private Limited
Allotment Basis
Retail Investors
Not less than 901,950 Equity shares
Non-Institutional Investors
Not less than 386,550 Equity Shares
Qualified Institutional Buyers
Not more than 1,288,500 Equity Shares
Disclaimer
Risk Factors
Some of the risk factors that need to be taken into account are: (i) All manufacturing units of company
are based within one geographical area, and hence exposed to the social, natural, economic, risks
localized in this area. (ii) Certain licenses / approvals relating to the issue have either not been received
or not applied for. (iii) Several outstanding litigations if decided against the company could adversely
effect its operations and financials. (iv) More than 45% of the company’s revenue is from sale of a single
product, while a few of the customers account for almost half of its sales. (v) Company’s business is not
covered by any business interruption policy. (vi) Pending utilization of the objects of issue, company
intends to temporarily invest the funds in high quality / dividend bearing liquid instruments. (vii)
Company is subject to restrictive covenants in certain debt facilities provided to its by its lenders. (viii)
Risks associated with group companies in the same line of business. (x) ON January 8, 2007, 400000
equity shares of the company have been placed with Gulf Pharmaceutical Industries at a price little lower
than the floor price of this issue. (xi) Sufficient insurance coverage may not be available for certain
losses that the company may incur. (xi) Company has filed applications for registration of non-infringing
process patents for some of its new products in developed markets. Processing of such applications is a
lengthy process and the outcome is unascertainable. (xii) Some of the external risk factors are terrorist
attacks, civil disturbances, political instability, economic recession, interest rate fluctuations, natural
calamities, adverse change in government policies and regulations, etc.
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