The year-end results that have been announced by pharmaceutical companies in the last week or two have been poorly received by the market; take the case of E Merck that barely managed to show some growth or Knoll Pharma and even Ranbaxy for that matter that performed below expectations. Besides, the outlook for a few other pharma companies such as Kopran do not appear to be all that bright. On the other hand there are a couple of pharma companies where the market expects a superior performance and are willing to pay a very fancy price for it. These high expectations are being tagged onto companies such as German Remedies and to some extent onto Pfizer as well. For one, the expectations though are not being tagged onto the company's growth rates which is expected to be around 20-22 per cent, the real change that is being discounted will be in the operating margins, a lower tax payout and in the final earnings per share.
In the just concluded financial year a fourth new plant was commissioned at Goa whichshould bring about a substantial growth in volumes for German Remedies. More importantly, the production of formulations from this plant will cater almost exclusively to the export market, mainly to one of its German collaborators and it marks German Remedies's entry into the anti- cancer formulations market in a big way (GRL's strengths lie in anti-asthamatics, herbal skin care products and laxatives amongst other products). As a result of its dedicated export status the revenues from this plant will bring in substantial tax benefits. However, the plant has become operational from the last quarter of 97-98 and the benefits will flow to it only in the current year which will also be the first full year of operations. The general expectation is that GRLs gross revenues will grow to atleast Rs 170 crore from Rs 140 crore earned in the last financial year.
The profits after tax should be in the region of Rs 17 crore from Rs 11.42 crore. Consequently, the expectation is that the company will be able to earnatleast Rs 22 per share for the full year; this expectation does not seem to be too unreasonable considering that in the first half itself it managed to earn an EPS of Rs 10. Further, over the last five years GRL has managed to grow its revenues by just 12 per cent, even though its profits have grown by 24 per cent compounded. Despite these figures, in the last two years GRL has been unable to beat its cost of capital. In 1996-97, the return on capital earned was just 19.5 per cent only marginally better than the 19 per cent return earned in the previous year. Besides that the dividend payout has been just one fifth of the profits and given its payout track record there is no reason to assume that the payout will be substantially increased for 1997-98.
But the market seems to be driven by some more evolved logic. This dramatic improvement in performance is also widely expected to prompt the management into declaring a bonus. And to a great extent it is this expectation of a bonus that is driving the marketinto a frenzy. In addition to that there is always the possibility that one of the five German companies (Asta Medica, Beecham Wulfing, Boehringer Ingelheim, Chemiewerk Homburg and Schering AG) that have promoted GRL may seek to consolidate its holding. As of now the 36.9 per cent stake that these companies hold collectively is scattered amongst them and none of whom hold a significant stake individually. This scattered shareholding has been a very grey area as far as the market is concerned as there has been some discontent amongst the various shareholders and continuity regarding the future of the respective shareholdings is by no means certain. This inherent instability as well as the poor return on capital in the past has not deterred the market in discouting the stock highly; the stock has already risen by almost 50 per cent since the third week of March to Rs 424; yielding a price earning multiple on expected earnings of 20 times.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
