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E.Merck: Healthy performance

Apr 5, 2002

E.Merck (India), the subsidiary of the German multinational Merck, reported encouraging numbers for the year ended Dec' 01 (FY02). A topline growth of 8% reported by the company is comparatively better than the performance of other MNC pharma peers. Both sales and operating margins improved on the back of upward price revision and relaunch of its vitamin brand Neurobion in June 2000.

(Rs m)FY01FY02%Change
Sales 3,134 3,385 8.0%
Other Income 67 85 26.2%
Expenditure 2,582 2,736 6.0%
Operating Profit (EBDIT) 552 649 17.5%
Operating Profit Margin (%)17.6%19.2%
Interest 23 6 -75.8%
Depreciation 72 95 30.8%
Profit before Tax 524 633 20.8%
Tax 139 186 34.3%
Profit after Tax/(Loss) 385 447 16.0%
Net profit margin (%)12.3%13.2% 
No. of Shares (eoy) (m) 17 17  
Diluted Earnings per share* 22.9 26.5  
P/E (at current price) 12 
(*- annualised)   

E. Merck is a market leader in vitamins and derives over 60% of its turnover from this segment. Three of its vitamin brands Evion, Neurobion and Polybion contribute almost 40% of the company’s turnover. During the first half of the current year the company re-introduced Neurobin with better marketing focus. However, the pharma division showed a sluggish growth of 3% mainly on account of competition from generic players. The slow growth in pharma division was more than compensated by a 20% growth in non-pharma division comprising laboratory and speciality chemicals.

The stock price of the company took a beating last year due to the fact that the government banned manufacture/ marketing of fixed combination of Vitamin B1, B6 and B12 (Neurobin). Besides, the government has been tinkering with this segment with steep price reductions. Such price reductions affected `Polybion`. Coupled with this, the vitamin segment as a whole was not logging any attractive growth rates. As a result, the company had to rework its business strategy by changing formulations and launching `Neurobion Forte`. Further, to overcome the high price volatility in Vitamin E due to fierce competition from Chinese and European suppliers the company is evaluating various options like better utilisation of plant capacity and outsourcing of ingredients.

At the current market price of Rs 325, the stock trades at 12x FY02 earnings. After hitting a low of Rs 240, from a high of Rs 460, the stock price of the company has witnessed a sharp correction in the last few days. The optimism seems to be due to the recent DPCO dilution with most of the vitamin brands coming out of DPCO. E. Merck derives around 60% of its revenues from the vitamin segment. The upsurge in the stock price currently has been on the back of encouraging performance and DPCO expectations. As per the indications, the company has recorded good sale numbers even in the first two months of the current year. However, the product portfolio of the company is still very concentrated and valuations going forward would depend on the success in new therapeutic areas ventured into by the company.

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