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Merck India: Restructuring drives growth

Dec 30, 2003

Merck India is a 51% subsidiary of Merck KgaA, Germany. The company derives almost 60% of its revenues from its pharmaceutical business and the balance from chemicals. The company’s pharmaceutical business comprises mainly of vitamins, cardio-vascular drugs, and cough and cold preparation. The chemical business on the other hand, comprises of analytics, reagents, scientific laboratory products and pigments. In the pharma business, delay in the implementation of liberalised pricing legislation and reduction in the prices of certain drugs (like Neurobion Forte tablets) by the government resulted in the company registering stagnant growth in pharma sales in FY03. In the chemicals business, during FY03, while the analytics and reagents division and pigments division grew by 17% and 52% respectively, scientific laboratory products division registered a 29% drop. The performance of the scientific laboratory products division was affected due to competition from Europe and China. Resultantly, the company, as a whole, had reported a marginal 2% growth in net sales and an 11% drop in net profits during FY03.

Results at a glance...
(Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
Net Sales 894 979 9.5% 2,644 2,712 2.6%
Other Income 18 39 119.1% 54 80 48.9%
Expenditure 722 728 0.7% 2,191 2,128 -2.9%
Operating Profit (EBDIT) 171 251 46.5% 453 584 29.0%
Operating Profit Margin (%) 19.2% 25.6%   17.1% 21.5%  
Interest 1 1 -11.0% 2 8 242.5%
Depreciation 25 22 -10.6% 73 70 -3.5%
Profit before Tax 163 267 63.5% 431 586 35.9%
Tax 55 94 71.6% 138 205 48.2%
Profit after Tax/(Loss) 108 173 59.4% 293 381 30.0%
Net profit margin (%) 12.1% 17.7%   11.1% 14.0%  
No. of Shares 17 17   17 17  
Diluted Earnings per share* 25.7 41.0   23.2 30.1  
P/E Ratio   10.7     14.6  
(* annualised)            

The stagnancy in topline growth continued during 9mFY04 with Merck India reporting a meager 3% growth. The topline growth was due to a 5% growth in the chemicals segment. The pharma business, however, registered a marginal 1% growth. On the operations front, various cost cutting measures undertaken by the company has helped it record an impressive 440 basis point improvement in operating profit margins. The company has discontinued manufacturing activities at its Taloja factory, which has helped bring down costs considerably. This apart, in 2003, 281 employees have opted for Merck’s voluntary retirement scheme, resulting in a drop in the staff cost. However, the raw material cost saw a sharp increase due to an additional charge made by the company for writing down the value of its inventory.

Expenditure as a percentage of net sales...
(Rs m) 3QFY03 3QFY04 9mFY03 9mFY04
Raw material 22.9% 27.8% 22.7% 30.3%
Purchase of traded goods 26.3% 19.9% 25.7% 18.9%
Staff cost 11.9% 9.4% 14.2% 11.9%
Other expenditure 19.7% 17.3% 20.2% 17.4%

An improvement in operating profits coupled with an increase in other income has helped the company register an impressive 30% growth in bottomline.

At Rs 440, Merck India is trading at a P/E multiple of 15x its 9mFY04 earnings. Competition from generics and small-scale manufacturers is eating into the company’s market share in the pharma and laboratory reagents division. Meanwhile, competition form China continues to adversely affect the company’s performance in the pigments division. This apart, the general performance of the pharma sector is also being affected by the delay in the implementation of DPCO 2002. To this extent, investors need to exercise caution while investing in this stock.

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