| Prior to the announcement, Infy ADS traded at a premium of over 60 per cent compared with its Indian share price. There was no way shareholders could take any benefit of this anomaly, because there was no further scope of converting equity shares into ADSs what with the number of Infy ADSs outstanding being the same as the number of ADSs originally issued. Increasing the number of ADSs on issue was the best option, and that's what the company has done. |
| Nevertheless, investors will not get the existing high premium of 50-60 per cent, as the ADS price will correct because of the increase in float and the arbitrage opportunity. After the proposed offer, the ADS float will increase by over 75 per cent, and this already led to a drop in the ADS price on Friday (post Infy's announcement). |
| Coupled with the rise in domestic prices on Monday, the premium has already shrunk to 47 per cent. The last time Infy had done a sponsored ADS offering, its premium had shrunk from around 75 per cent (prior to the announcement) to 27 per cent around the time of the issue. |
| A similar trend can not be ruled out, especially since the size of the float is much bigger than the previous one. Also, on a pro-rata basis, investors may be able to offer only around 6.5 per cent of their holding, if all shareholders participate. |
| It may just be prudent to offload shares at the current domestic price (considering valuations are rich at 30 times FY05 earnings), instead of waiting for the sponsored ADS offering. |
| Ranbaxy: mild shock |
| The obvious casualty of Schwarz Pharma AG discontinuing the development of Ranbaxy Laboratories' RBx 2258 molecule (meant for treating benign prostrate hyperplasia) has been the domestic pharma's stock which fell 2.5 per cent in Monday trading. |
| The latest development has raised questions whether Ranbaxy would be able to transform itself from a large generic player to a multinational pharma company, which could individually or jointly develop commercially viable molecules and thereby earn higher profit margins. |
| That could lead the markets to take a re-look at the premium the company enjoyed on the bourses prior to this development, with a trailing 12-month P/E of 36.4 vis-a-vis 24.6 for Cipla and 27.2 for Sun Pharmaceuticals. |
| However, the rift with Schwarz may not affect earnings forecasts, as analysts often exclude anticipated milestone payments from their estimates, owing to the inherently volatile nature of this revenue stream. |
| This development nevertheless highlights the difficulties for domestic pharma companies-the pay back from R& D expenditure (for Ranbaxy they grew 44 per cent in the last quarter) could be extremely slow. |
| The problem has been compounded with growth in the home markets slowing considerably in the last few months coupled with adverse FDA rules on generics and the new patent regime expected to increase the competition from MNC players. |
| However, all hope for profit growth in the medium term for Ranbaxy has not been lost, as it has been expanding its sales of branded products in the US as well as growing market share in the European generics market. In addition, it has also received recent US FDA approvals for several products, which should help drive profit in the medium term. |
| Acquisition of Blue Dart |
| Rumours of a Blue Dart buyout have been in the markets for over a year. Keeping that in mind, the final announcement may be a little late in the day; but for investors it couldn't have happened at a more opportune time. The Rs 350 per share DHL is paying Blue Dart promoters is more than double the levels the stock had reached in early January. |
| What's more, things have never been better for mid cap stocks, and so from a shareholder point of view, the timing is ideal. At Rs 350, DHL is paying about 25 times trailing 12-month earnings till September 2004. |
| That may be a tad high, based on expected growth rates in the future. But considering that Blue Dart enjoys market leadership with a 40 per cent share of the market, the valuation is fair. |
| There's a strong likelihood that DHL would make an offer for the entire minority shareholding, since its holding would reach almost 90 per cent if a 20 per cent offer is fully accepted. |
| But even if it makes only a 20 per cent offer, the point Blue Dart shareholders need to keep in mind is that capital gains tax rates are different for market transactions and off market transactions (including open offer). |
| Long-term and short-term capital gains tax rates for off-market transactions are 10.2 per cent and 30.6 per cent respectively, compared to 0 and 10.2 per cent for market transactions (effective October 1, 2004). |
| The table alongside shows that it makes sense for short-term investors (holding of less than 12 months) to exit at current levels, while for investors with a longer-term holding the open offer makes more sense. |
| With contributions from Mobis Philipose and Amriteshwar Mathur |
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