Claris Lifesciences is one of the few decent size pharmaceutical companies  coming out with an IPO of around Rs 300 crores ($65mm) in the price band of Rs 278-293 which would give it a market cap of around Rs 1800 crore (corrected).Most of the money would be used in manufacturing expansion as the company is still in the capex phase spending around $20-30mm annually.There is a lot to like in the stock except for the management.The Pharma Sector is one where India has done extremely well boosted by its low cost qualified labor something like the IT sector.The Indian Pharma Sector excel in the Generics Category which has been receiving increasing global attention for reducing ballooning health-care costs.India posseses a definite competitive advantage in the Generics Category.Here is the list of pros and cons for Claris LifeSciences

Advantages

1) Injectables Pharma Sector – The Company operates in the Global Injectables Sector which has higher barriers to entry .”This is a very lucrative industry segment because there is less competition in these products which reduces scope for price reductions and enables players to obtain high profitability margins”

2) Good Growth,Steady High Margins,Diversified End Markets– The Company has shown pretty good growth while maintaining steadily high net margins of 15-18%.The Operating Cash Flow has also been good during the past time periods.International Sales have been growing both absolutely and relatively to form 55% of the sales.

3) Valuation – The Company will be selling for Rs 1800 crore market cap on profits of Rs 130 crore which would make it around 14x trailing P/E (corrected).The Stock does seem to expensive on other metrics also with around 3x P/B and 2x P/S.Note the stock would be relatively undervalued compared to the general Indian Pharma sector which trades at around 20-25x.

4) Domestic Pharma Demand – The Indian Pharma Industry has grown by around 15% in the past 10 years which is around 1.5x the GDP growth rate approximately.Around 90-95% of the Indian Pharma Industry is based on Generics.With rising per capita income,very low healthcare penetration,Claris will benefit from the strong domestic market growth in the future also.

Disadvantages

1) Low Quality Management – “One of our erstwhile promoters and relative of our individual Promoter (included in our Promoter Group), Mr. Sushil Kumar Handa, the Ex-Chairman and Managing Director of the erstwhile Core Healthcare Limited, is included in the list of wilful defaulters, in his capacity as a director of such company, maintained by the Credit Information Bureau (India) Limited. Furthermore, there are certain criminal investigations relating to alleged economic offences, which are currently being investigated by the Central Bureau of Investigation and the Anti Corruption Bureau, and offences under the Drugs and Cosmetics Act, 1940, some of which are currently pending against him; and he was declared as a proclaimed offender due to non appearance at hearings in one such instance”

Note Carlyle is the other major promoter of the company with around 15% ownership pre-IPO of the company.

Summary

There is a lot to like about the Claris LifeSciences Stock except for the management.The Pharma Companies are also quite volatile with patent cases and government regulations leading to sharp ups and downs in the stock.The Company seems do be doing well on financial parameters with good growth as well.The Management is the only feature of the Claris Lifesciences which does not make it a must buy.