Ranbaxy: Partnering for progress

Ranbaxy Laboratories has been seeking to check rising marketing costs in overseas markets via alliances and it is employing this strategy for one of its products that has recently gained regulatory approval. Quinapril HCI tablets manufactured by Ranbaxy (medication for the anti-hypertensive segment) would be distributed by Teva in the US market. The size of this market is estimated at approximately $555 million (Rs 2440 crore) and since profits are to be shared between the two companies, Ranbaxy's margins are estimated at 25-27 per cent (taking into account the possibility of competition from authorised generics).Apart from Quinapril HCI tablets, Ranbaxy had also received US FDA approval to manufacture and market 40 mg capsules of fluoxetine (medication for depressive disorders). The size of this market is estimated at $176 million (Rs 775 crore) and profit margins for Ranbaxy are estimated at 30 per cent. Analysts expect these two medications to help Ranbaxy's turnover grow by $30 million annually, which is less than three per cent of its estimated CY05 revenues.Ranbaxy isn't the only Indian company involved in marketing alliances abroad. Cipla has also been employing a partnership-based model which limits aggressive profit expansion as it has to share profit with its overseas partner, but at the same time is understood to be a low risk model.Such a strategy, nevertheless, enabled Cipla to contain selling, general and administration expenses at 16.8 per cent of revenues in FY04. Ranbaxy meanwhile spent 20.6 per cent of sales on SG&A, leaving ample room for cost cutting on that front.Meanwhile, Ranbaxy continues to be the most prized pharma stock thanks to its diversified product portfolio and geographical spread, but at 25 times one-year forward (CY05) earnings it seems "over-prized".Banks' investments Banks have invested far more in shares this year than in 2003. RBI data shows that, as on November 12, 2004, total banks investments in shares amounted to Rs 12,105 crore, an increase of Rs 3438 crore this fiscal. During the same period last year, bank investment in shares actually fell by Rs 438 crore. Moreover, banks seem to prefer investing in the private sector, and investments in the shares of private sector companies rose to Rs 10,312 crore as on November 12 this year, a rise of Rs 2,917 crore this year. For the corresponding period last year, bank investments in the share of private companies was down by Rs 311 crore. Over the same period this year, bank investments in the shares of public sector companies also increased, albeit by a much smaller Rs 521 crore.Did the banks take advantage of the big IPOs to increase their exposure to the stock market? Not really, since they do not seem to have been large subscribers to either the ONGC or the NTPC issues, and in any case their exposure to public sector shares has not been very high. Nor do they seem to have subscribed to the TCS issue. That's because the bulk of the net addition to the banks' portfolio of private sector shares occurred between October 1 and October 15. While bank investments in private sector shares was at Rs 7682 crore as on October 1, that went up to Rs 10,327 crore a fortnight later. The surprising thing is that there was hardly any increase or decrease in bank investments in shares either before or after that fortnight.Incidentally, banks have also been pruning down their investments in bonds and debentures. They've pruned down their investments in public sector bonds by Rs 3,970 crore this fiscal, although their investments in private sector bonds have risen by Rs 4,413 crore.Britannia Industries With the markets trading at all-time highs and since a majority of scrips have seen a sharp increase in valuation, it's not surprising that stocks which were earlier ignored have now joined the rally. A case in point is Britannia Industries, which has underperformed the market by a huge margin. Before the Britannia stock joined the rally in mid-October it traded at a PE of just 12 times estimated FY05 earnings.Having risen 33 per cent in the past two months, its valuation has now improved to around 16 times FY05 earnings. But in the case of Britannia, the stock's catch-up act may well be justified. In early November, it announced the appointment of a professional manager as its CEO, which ended months of uncertainty whether the company would be run by the promoter family itself.Further, the company's upcoming manufacturing facility at Uttaranchal with a capacity of 45,000 tonnes is expected to lead to significant cost savings in the next two years. Currently the company outsources to the extent of almost 70 per cent of its total biscuit sales. The new capacity, being set up in a zone which enjoys tax breaks, would clearly boost profitability.What's more, the biscuit category has been among the best performing categories in the FMCG space this year. Britannia's net sales grew 13.38 per cent in the six months till September 2004.Buoyed by cost savings from the new manufacturing facility and the encouraging growth prospects, analysts expect earnings to grow at around 25 per cent for the next two years. At around 13 times estimated FY06 earnings, Britannia is part of a rare club of stocks that are not absurdly high priced.With contributions from Mobis Philipose and Amriteshwar Mathur

Ranbaxy: Partnering for progress

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