As a result of a provision of Rs 2.76 crore towards a VRS and Rs 0.63 crore towards gratuity, E Merck (India) has reported a drop in net profit by 37.73 per cent from Rs 2.82 crore to Rs 1.76 crore. Provisions apart, the company's profit before tax would have shown a robust growth of 17 per cent. The topline grew 13.4 per cent.

Taking provisions into account, the company's operating margin has dropped from 13.5 per cent to 12.12 per cent. The reason for the low margins, compared to other MNCs in the sector, is that around 70 per cent of the company's turnover is under price control. Margins, though currently under pressure, are likely to improve as prices of one of its key products, Neurobion, has been increased by 9.6 per cent from Rs 229.75 for 50 ampoules (blister pack) to Rs 251.86, following a directive from the NPPA. Injectible Neurobion has sales of Rs 21.26 crore, while the tablet form had recorded a sales of Rs 15 crore last year.

E Merck will also benefit from the fact that itsother main product vitamin-B complex syrup Polybion is out of the price control net as it has been assigned to a small scale manufacturer. The Polybion syrup is currently been manufactured by Cradel Pharmaceuticals Pvt Ltd at Indore, under the technical assistance of Merck KGaA, and accounts for approximately one-third of E Merck's total Polybion sales of Rs 34 crore. Subsequent to this move, the price of the brand has been increased by around 15 per cent. These are very significant moves as close to 70 per cent of E Merck's turnover comes from its popular vitamin brands, Polybion and Neurobion.

The company has also made a representation to the authorities to increase the prices of its vitamin E brands. If this goes through, the margins of the company are likely to improve substantially. However, on the flip side one, of the company's smaller brand anti-anaemia Anemidox, with an annual sales of Rs 75 lakh will be under price control.

Apart from this, the company is likely to benefit from the host ofproducts it is planning to launch subsequent to the acquisition of Seven Seas by Merck KGaA. The first item to be introduced will be the nutrition-related cardiology drug Maxepa. Though E Merck, as per the current agreement will not be able to launch the famous cod liver oil brand of Seven Seas before 2000, it is trying to prepone the launch date as Universal Medicare, which currently market the brand has already launched a substitute brand Seacod apart from marketing the Seven Seas brand.

E Merck has shut down its chemical manufacturing unit at Taloja and plans to outsource its requirement. Though the move has resulted in a VRS which is likely to cost the company a one-time charge of over Rs 10 crore, in the long run the company will benefit.

On the financial front, the company has repaid all its long-term debt apart from the ECB of Rs 8.56 crore, 50 per cent of which will be paid this fiscal. Interest payment has, therefore, come down from Rs 1.61 crore to Rs 0.99 crore. Further, the company willcontinue to enjoy tax benefits for its soft gelatin plant in Goa which is already running at full capacity.

Considering the fact that the margins of the company are likely to improve by an increase in the product prices, the new product launches and the benefits of the patent law, the company is in for good growth rates. The current price of Rs 518 looks attractive, considering the fact that the scrip has lost 33 per cent from its high value of Rs 779 to the current level due to the political turmoil.

Marico Industries

Despite operating predominantly in commodity oriented product segments, Marico Industries has recorded an impressive performance for the year ended March 1999. Thanks largely to a strong second half where revenues have grown a solid 15.61 per cent, compared to a first half growth of 8.86 per cent.

Turnover for the 12 months ended March 1999, was up 12.49 per cent aided by volume-led growth in all its product categories, except for Saffola - where sales were restricted due to rawmaterial constraints. Brands like Parachute, Sweekar, Hair & Care and Sil, all among the top two in their respective segments, have all performed well. Increasing exports to the Middle East and SAARC countries have also helped. The dropsy scare resulted in an increase in the refined oils consumer packs category which had grown by 11.2 per cent in volume and 35 per cent in value during the first half.

But despite this volume growth, fluctuating raw material prices and increased ad-spend on brand awareness, given the entry of Levers into the hair care segment, have taken a toll on margins. A fact reflected in operating margins moving up only slightly, from 9.14 per cent to 9.26 per cent.

But this hiccup aside, the bottomline growth of 24.88 per cent from Rs 30.04 crore to Rs 37.51 crore is commendable. The boost to net profits is largely due to a lower interest burden and a lower effective tax rate. The interest burden has dipped 36.99 per cent to Rs 3.71 crore, mainly due to a fresh infusion of funds worthRs 17.5 crore by an offer for sale by the promoters at a premium of Rs 165 per share. With these funds, the company repaid term loans to the tune of Rs 11.25 crore.

The acquisition of the Mediker (an anti-lice shampoo) brand from P&G should further strengthen Marico's hair care product range. However, considering that it was one of the laggards in P&G's product portfolio, Marico might well have to pump in both distribution muscle and money to rejuvenate the brand. This aside, intense competition in the hair and cooking oil segments from multinationals, and the consequent higher promotional expenditure, could continue to put pressure on margins. However, the capacity expansion in Goa and product extensions in the form of mustard oil in north India and cottonseed oil in south India bode well. Marico would also do well to realise the untapped potential of the rural regions. A wider distribution network in this direction would help bring about further volume growth.

(With contributions from Shishir Asthanaand Percy Dubash)