Surya Pharmaceuticals (Surya) is a Chandigarh-based pharmaceutical company with four manufacturing facilities spread across three states of Himachal Pradesh, Haryana and Punjab. The company produces semi synthetic penicillin based products, first generation cephalosporins, anti histamines, drug intermediaries and formulations. Surya can be considered predominantly a bulk drug or Active Pharmaceutical Ingredient (API) manufacturer, as formulations constituted less than 4% of revenues in FY 2002-03, while the balance was contributed by API, intermediaries and others. Surya Pharmaceuticals is relatively a very small player in the current context. Nevertheless, it has found a space in both domestic and overseas market. In the domestic market, it has opted to become preferred supplier of APIs to domestic pharma majors. In the overseas market, it has been focussing on Far East, Middle East and South Asia. Overall it plans to focus equally on domestic and export market. The company has offered 30 lakh equity shares of Rs 10 each at a premium of Rs 35 each, aggregating Rs 13.50 crore. The issue proceeds will be utilised, predominantly to augment working capital requirements at Rs 10.47 crore, Plant and machinery for R & D amounting to Rs 2.33 crore and for preliminary and public issue expenses of Rs 0.70 crore. Rajeev Goal, who is currently the company's Managing Director, has promoted the company. The core promoters hold 36.41% stake in the company, which will come down to 25.98% post issue. The promoters friends and associates hold 63.58% stake in the company, which will come down to 45.34% post issue. Over the past three yeas, the company's plant has been operating around 60% capacity utilisation, due to paucity of working capital. Of the proposed issue proceeds of Rs 13.50 crore (including premium), nearly 78% amounting to Rs 10.48 crore is towards augmenting working capital. On successful completion of the issue, the company is hopeful of scaling up the capacity utilisation of bulk drugs, intermediates as well as formulations to 85% in 2003-04, 90% in 2004-05 and to 95% in 2005-06. The company is presently fetching significant revenues from products like Ampicillin, Amoxicillin, which have very low margins, but have significant growth potential in terms of volume. While the company will optimally capitalise on the growth potential and scale up volumes to improve capacity utilisation and profitability, it has also planned to move up the value chain. The company's strategy to move up the value chain is multifold. It plans to (a) Increasing the share of higher margin compounds like Cephalexin, Cefadroxyl, Loratadine, Dicloxacillin etc (b) develop new molecules in other therapeutic areas like anti-ulcerants, anti-diabetes (c) Progressively shift to third generation penicillin based cephalosporins like cefixime, cefuroxime, cefdinir, cefporgyl etc, which are already ready for commercial launch (d) Increase the share of regulated markets in the export revenues. Currently, the company is focussed on manufacture of tablets and capsules for Pencilling G based products, wherein it has strong presence in API segment. Given the current relatively low level of activity, the company is supplying the formulations on loan license basis to Indswift. This ensures that the company does not end up spending huge amounts on promotion, distribution etc, which may not be justified for current volumes. Further, the company plans to expand its formulation business through tie-ups with few other major pharma companies. The company has been funding its expansion projects predominantly through debt, augmented by internal accruals. As a result, its interest and finance costs as a percentage of year-end debt were very high at 22% in 2001-02, 17.3% in 2002-03 and 19.0% in the six months ended Sept'03. Given the low interest regime prevailing in the country and the availability of the funds from the current IPO, its interest costs can come down significantly, thereby powering the bottomline.