Sun Pharma's annual results of 1997-98 bring out the fact that shareholders of Tamil Nadu Dada Pharmaceuticals (TNDP) have gained quite a bit. The EPS of the erstwhile TNDP has increased by 60 per cent, compared to the original shareholders of Sun Pharma who have benefited only to the extent of a 12 per cent increase in their EPS. However Sun Pharma's shareholders have gained from the reduced interest costs after the restructuring exercise and enhanced cash flows in the future.

Considering that the pharma industry has grown at the rate of 8-12 per cent this year -- a growth rate of 15 per cent per annum is impressive. Secondly a presence in the niche areas of psychiatry, cardiology and diabetics, continues to ensure high operating margins. Furthermore a clever choice of products catering to long term therapy needs, rather than infections has relieved the earnings stream from the cyclicality in business. Also the Silvassa facility should restore tax benefits which would continuetill the year 2000. Moreover the tax-free profit from its partnership firm "Sun Pharma Exports" has resulted in tax -rate of just 2 per cent which is the lowest in the industry. Also in the past, there was concern regarding Sun Pharma's bulk drug business and its export exposure to Russia. However, the company's exports as a percentage of total exports to Russia have fallen this fiscal.

Moreover, the company's JV in Europe intends to source its bulk drug requirement from India. Thus the volume growth in bulk drugs should compensate for near stagnation of margins.

CyberTech Systems

CyberTech Systems has of late caught the fancy of the stockmarkets. The scrip which like many software stocks was quoting at around the Rs 85 levels in February has appreciated substantially and currently hovers around the Rs 230 mark. Moreover the reasons are obvious -- an investment of Rs 55 crore, the $28 million US company Cybertech International is slated to pick a 51 per cent equity stake in this company. Whichanalysts state should take the equity holding of the company and its associates to around 80 per cent, create a major liquidity problem for the company's stock. Moreover, for the year ended March 1998, CyberTech Systems has posted decent results. Sales have increased by a sizeable 63 per cent to Rs 12.07 crore.

However operating margins have reduced to 61.4 per cent from 70.9 per cent. Thanks largely to a whopping 116 per cent increase in total expenditure which has dented the margins. Interestingly though the company is in the final stages of completing its software park at Thane at an investment of Rs 21 crore.

By charging depreciation on the useful life of the computers, the company has provided for higher depreciation. Commensurately, the depreciation amount at Rs 70.27 lakhs is higher by Rs 24.82 lakhs. Other income at Rs 9.68 lakh contributes only nominally to the bottom line. Net profits have increased by 43.8 per cent to Rs 7.45 crore. For the future, Cybertech would continue to focus onaddressing the large requirements of clients for Y2K conversion. Apart from SAP training, which is currently the main activity of the company, the thrust would be on offshore software development. Considering this scenario and that returns from its software park should also start coming in shortly, the company appears to be on a steady wicket.

Dr Reddy's Laboratories

The management at Dr Reddy's believes that the 1997-98 performance has set the company on steady growth path for the next three years. However Dr Reddy's would still have some way to go before it realises the margins earned in 1995-96. Formulation sales in the last fiscal year helped the company achieve an operating margin of about 22 per cent, which although higher than last year by a couple of percentage points, was lower than the 27 per cent achieved in 1995-96.

Formulation sales have contributed about 63 per cent of the total turnover in 1997-98. But more than the composition of total turnover, the growth rate in formulations incomparison to bulk drugs has been phenomenal. The CAGR growth rate for bulk has been around one per cent for the last five years, while there is a CAGR growth of 37 per cent in the formulations segment during the same period. Even assuming that the company's formulations contribute 68 per cent of total sales turnover next year as per their projections, the fundamental problems still remain.

Firstly, cheaper imports and over capacity in the domestic bulk drug industry has resulted in a steep fall in prices. This is unlikely to improve in the near future as all the bulk drug players can manufacture 4-5 times their present volume turnover. Furthermore although, the inventory turnover which was 150 days in 1996-97 has become 130 days, in still higher in comparison to its peers. Thirdly, the exports are still skewed to the CIS countries which puts the payments in doubt. As a percentage of total exports approximately 60 per cent of formulation exports are to CIS countries. Moreover the debt:equity ratio would notbe seeing much change as the company plans to maintain the present capital structure for the next three years. Hence the cost of capital should not change. The doubling of the tax rate from 4 per cent to 9 per cent has not effected the net margins, which rose from 13 per cent to 14 per cent.

But ultimately, the bottomline growth in DRL would be more because of its premium pricing and promotional schemes for the North and East Indian markets where they lag behind.

Emcee (With contributions from Manish Saxena and AG Krishnan)