New Delhi: In a dusty, congested industrial suburb of New Delhi is tucked away a firm that could soon be the fifth largest maker of fine chemicals globally and which ICICI Venture, India’s largest private equity firm, calls “one its best buyouts till date”.
Fine chemicals are compounds made in relatively small amounts and in a comparatively pure state, such as perfumes, photographic chemicals, pharmaceutical and biological products.
Once a part of top Indian drug maker Ranbaxy Laboratories Ltd, RFCL Ltd—it dropped the full name Ranbaxy Fine Chemicals Ltd exactly a year after it was acquired by ICICI Venture in December 2005— has almost doubled its turnover in the last two years and is eyeing an acquisition bigger than itself in Europe. Next stop: Rs500 crore of revenues by 2010 and an initial public offering (IPO) in a year.
Outlining his company’s strategy, RFCL managing director Sushil Mehta says the target was to touch Rs500 crore in revenues by 2009-10, a figure that he added they could achieve a year ahead of schedule. For the first annualized year after the sell-off in 2005, RFCL clocked revenues of about Rs150 crore and is going to close 2007-08, estimates Mehta, with annualized revenues Rs300 crore.
The year before the sell-off, RFCL was “a reasonable business” of Rs125 crore, says Mehta, who declines to state how much ICICI Bank’s venture capital arm paid the Gurgaon-based drug maker as it sold off its non-core businesses to focus entirely on pharmaceuticals and drug research.
RFCL consists of laboratory chemicals unit Rankem, which contributes 40% to sales; Diagnova, which provides biomedical services and adds 29%; animal health-care division Vertex, contributing more than 30%; and a custom synthesis unit, Neosynth, which currently forms a minuscule portion of the business. Eyeing the export markets in the US and Europe, it is stepping up its focus on animal health care and establishing a plant in Haridwar, Uttarakhand, that would start operations in April.
“The Ebitda (earnings before interest, tax, depreciation and amortization) for our businesses ranges between 13% and 20%. We brought it up from 8-17% last year and there is scope to bring it up to 16-22% in the next two years,” says Mehta, banking on larger revenues and backward integration owing to the Haridwar plant.
A hived-off allied business itself, RFCL has made a corporate strategy out of picking up other such units and patching them together into bigger, diversified business group. Animal health care is a Rs1,250 crore market, growing at 10%; while that of laboratory chemicals and solutions is worth Rs1,960 crore, growing at 15% yearly; and medical diagnostics at Rs1,372 crore is increasing by 17-20%. Mehta is gunning for double the market growth rate for RFCL.
“India is an underserved market in all these segments,” said Hitesh Gajaria, pharmaceutical sector leader at consultant firm KPMG, referring to animal health care, medical diagnostics and laboratory chemicals business, but warned that each had its set of challenges. Talking of the challenges in the animal health-care segment, Gajaria said: “The issue is, how do you scale up? The set-up is not exactly organized and to tie up with veterinary hospitals and to take supplies to grass-roots level, and having to service cattle owned by farmers is a challenge.”
“RFCL is doing pretty well for us and is one of our best buyouts till date in terms of returns and ability to work with the management teams,” says ICICI Venture director (investments) and RFCL chairman Aluri Srinivasa Rao, who had spent 18 months in convincing the Ranbaxy team and stitching up the deal. The company was fully bought by ICICI Venture in 2005, which subsequently sold 5% equity to a team of 13 managers as “they wanted management to be invested in it,” explains Mehta. Another 11% was sold to UK-based investment firm GLG Partners Lp. for $20 million (around Rs85 crore then) on 1 April 2007, pegging the company’s valuation at $182 million.
Aluri says he had laid out five goals for the company to achieve in 2005. One of them was to be the largest player in the markets of biomedical services, animal health care and lab chemicals, and be globally relevant in at least one of them—a goal RFCL may achieve sooner than Aluri himself had thought. “RFCL is in the final leg of negotiations with a fine chemicals company in Europe which has revenues more than RFCL’s own. It would make RFCL the fifth largest player in the world,” Aluri said.
The top global players in fine chemicals are Sigma Aldrich Co., Thermo Fisher Scientific Inc., Merck KGaA and Mallinckrodt Baker Inc.
The announcement, expected in a month, would be its fourth acquisition in the last seven months. Mehta doesn’t say how much he has spent on the other three buyouts but conceded that the $20 million fund infusion is “more or less exhausted” in the process.
RFCL acquired Wipro Bio- med Ltd in August 2007, and Godrej Medical Diagnostics and Alved Pharma and Foods Pvt. Ltd in the first week of January this year—all allied businesses of bigger companies that were being sold off as their parent organizations streamlined their businesses.
“It was business which we thought was non-core. Moreover, we were primarily on the distribution side of medical diagnostics, with no manufacturing, unlike RFCL. There was no end-to-end synergy or value addition from us,” explained R. Rajesh Ramaiah, corporate treasurer for Wipro Ltd.
ICICI Venture’s other goals for RFCL included growing at a rate double that of the market, converting a marketing company into an integrated manufacturing one, transforming a bunch of employees into behaving like owners and increasing the valuation to a billion dollars by December 2010. Aluri said ICICI Venture was in no hurry to exit, but RFCL was “a highly listable company with predictable cash flows.” Mehta estimates an IPO by the end of the next fiscal.