Mumbai: India’s third largest drug maker by sales, Cipla Ltd, will raise up to Rs1,500 crore by preferably selling shares to institutions rather than raising the money through debt, a company executive said.

Numbers game: A file photo of Cipla employees at a plant in Pune. Bloomberg

The company intends to use the funds to reduce short-term debt raised to meet working capital requirements in the past couple of years and also fund some of its new projects in the next two years.

“We would prefer to maintain our debts low, and thereby, a reduced interest cost. Since the promoters’ stake is comparatively high, an equity dilution through QIP (qualified institutional placement) route may not be a risky option for fund-raising," the executive said, requesting anonymity.

The company’s promoters hold about 40% stake at the end of June. A final decision on the equity dilution and the timing of the issue will depend on the market conditions, the official said.

“The company has made an enabling provision to raise new funds mainly aimed at repaying the borrowings that we had in the past and also for future expansion and working capital requirements," managing director Amar Lulla had told Mint on Wednesday.

Cipla’s short-term loans total about Rs1,000 crore, of which Rs932.61 crore worth of unsecured loans are due by March. The company posted net profits of Rs776 crore in 2008-09 on sales of Rs5,326 crore, whereas its interest cost was about Rs35 crore.

In the past three years, Cipla has invested around Rs1,900 crore in fixed assets, mainly to expand in order to meet increased demand. Its construction work at a Rs750 crore special economic zone (SEZ) for drug formulations at Indore, Madhya Pradesh, is likely to be completed this year.

An SEZ is an enclave aimed at increasing investment and exports. Companies based in SEZs are eligible for tax and other incentives.

The new funds will also be used partly to establish another factory to manufacture active pharmaceutical ingredients (API) and a research and development facility at Patalganga in Maharashtra.

Cipla will also invest in a new API facility in Bangalore, in addition to an expansion of its research facility at Vikhroli, a suburb of Mumbai. For these projects, as well as fresh working capital requirement, the company needs another Rs900 crore to be invested over the next two years, the Cipla executive said.

However, the firm’s SEZ project at Kerim, Goa, where it had proposed multiple manufacturing plants, is still stuck as the state government passed a stop-work order in 2008 after deciding to impose a statewide ban on SEZs.

In February 2008, Mint had reported that Cipla was considering starting a new project in Indore following the stalemate in Goa. The Indore project includes facilities for the manufacture of aerosols, liquid oral medicines, pre-filled syringes (PFS), nasal sprays, large volume parenterals (LVP), eye drops, tablets and capsules. LVPs are injectible nutrients when a patient can’t eat. Commercial production at this site is expected to commence in 2010.

Cipla had commissioned another large factory with an estimated investment of Rs310 crore in Sikkim in 2008 to make formulations such as capsules, tablets, nasal sprays, inhalers and eyedrops.

“The company had in fact managed significant portion of the investment for capacity expansion through internal accruals. The lion’s part of the past borrowings were to meet the working capital," the executive said.