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Hoechst: Hope for the best

Jun 27, 2001

The sales figures for the first five months of Hoechst (now Aventis Pharma Ltd) are bit disappointing. While the company had reported a growth of 10.8% in the first quarter (January to March) of the current year, the first five months have seen a sales growth of only 5%. This implies that sales have infact shown degrowth of over 2% in the months of April and May. The volatility in sales may be due to recent product restructuring carried out by the company. The company's product portfolio now includes a rather unique combination of old, mature brands as well as new product launches, which have met with remarkable success as shown in the table below. The strategy for the company going forward is to concentrate on these strategic brands to ensure growth in the future.

Strategic New Products QoQ*
Growth (%)
Cardace 96
Clexane 46
Allegra 61
Amaryl 66
Insuman 25
Targocid 32
(*Jan- March'Q1 01-02 over 00-01)

....Access to parent's pipeline and strong brands remain trump cards

  • Aventis Pharma (which holds 50.1% stake) has an enviably rich pipeline of products and the Indian company is expected to benefit from that in the coming years. At this point of time, it seems that the parent company would continue to give fast access to its worldwide product portfolio.

  • The older products of the company, though growing at a slow pace command significant brand value. Some of the products from the company's stable include Avil, Daonil, Soframycin, Novalgin, which are now household names.

Restructuring has helped...

    Rationalization of products coupled with aggressive growth in new products helped the company reduce its DPCO coverage to 40% from 60% couple of years back. New product contribution to the total domestic formulations sales now contribute more than 16%, up from 6% a couple of years back. Further, rationalization of expenses, particularly staff cost has also helped in achieving more than 200 basis point improvement in its operating margin.

    The recent sale of the company's Mulund facility (as part of restructuring) is expected to generate considerable cash flows for the company. The company has already reduced its debt to the tune of Rs 225 m in the last year. With additional cash flows from sale of this property, the debt burden is expected to reduce significantly in the current year.

    The new Goa plant of the company has already been inspected by German FDA. It is expected that HMR's facilities would be used as a global source supply for its parent company. (Particularly for an intermediate of articaine hydrochloride and a key intermediate for ramipril).

Synergies with Rhone Poulenc Rorer (RPR)
HMR has 49% stake in RPR India and the balance is held by the parent company. RPR's strong portfolio in cardiovascular and oncology segments would help in the carving a niche in these high growth segments.

At the current market price of Rs 403, HMR trades at 21 times its FY2002E earnings, which is lower to its peers in the industry. The reason for the same seems to be successive disappointments due to non-relaxation of DPCO in favour of the company and drop in sales growth due to product restructuring.

HMR- A comparative valuation
Particulars Pfizer Glaxo SmithKline Hoechst
CMP (Rs.) 450 329 160 403
Market Capitalisation (Rs in mn) 10,530 19,674 4,704 9,269
Market Cap/Sales (x) 3.2 2.3 1.5 1.7
EPS (Rs.) 16 11.8 10.4 13.8
P/e-2001 (x) 28.1 27.9 15.4 29.2
P/e-2002 E (x) 25.3 35 13.7 21
(*based on latest full year results)

To summarize, the triggers for the stock are the expected outsourcing by the parent company 6-8 months down the line, growth in strategic new products, further introduction of new products and expected dilution of DPCO. Though, the company has been moving in the right direction, it needs to be seen how well the restructuring exercise pays off. Further, though the company has been able to command premium price for its strategic products till date, it might face stiff price competition from domestic players. Further, the transfer pricing norms of new products imported from Aventis remain a cause of concern.


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