Hoechst: Is restructuring paying?

Hoechst Marion Roussel (HMR) went through a major restructuring exercise in the last three years. The company aggressively rationalized its product portfolio replacing older products and reducing its DPCO exposure. The DPCO exposure of the company, which was around 60% a couple of years back, is now down to 40%. Quick launch of new products helped in increasing new product contribution to the total domestic formulations sales to 16% (up from 6% couple of years back). Post restructuring, the company’s product portfolio is a 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.

Further, rationalization of expenses, particularly a drastic reduction in staff costs helped in improving operating margins. Moreover, as part of restructuring, HMR is shifting its operations to low cost manufacturing facilities. The recent sale of the company’s Mulund facility is expected to generate considerable cash flows for the company. The company has already reduced its debt by Rs 225 m in the last year (almost 50% of total debt). With additional cash flows from sale of this property, the debt burden is expected to reduce significantly in the current year. The company’s new facility at Goa 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).

However, the sales figures for the first six months of HMR were a bit disappointing. While the company had reported a growth of 10.8% in the first quarter (January to March) of the current year, for six months ended June'01 sales grew merely by 2%.

The volatility in sales is due to the fact that the growth in volumes has been negative in the three months period, March-May’01. The older brands of the company, being in the traditional segments are trapped in the overall slow growth of the industry. Though it is a bit early to conclude, it seems that new products sales growth is also showing signs of stagnating at higher base.

Further, the price growth of the company remained flat in the corresponding three-month period (March-May’01). Though the company has been able to command premium price for its strategic products till date, it may be facing price competition from domestic players, which remains a cause for concern. The company needs to maintain a flow of new product launches to sustain growth momentum.

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. Further, HMR has 49% stake in RPR India (balance being held by Aventis Pharma), which has a strong portfolio in cardiovascular and oncology segments. This would help in creating 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 the recent drop in sales growth. To summarize, the fact remains that the company’s product portfolio boasts of some impressive brands. Hence, DPCO dilution in the company’s favour remains one of the triggers for the stock price. Further, though the company is moving in the right direction, it needs to be seen how well the company maintains its growth momentum in future.