Right dose

Generic majors to see another buoyant quarter

Domestic generics majors such as Ranbaxy and Dr Reddy's are expected to see another quarter of buoyant growth in operating profit and sales in the December 2006 quarter, thanks to their acquisitions in early CY06, point out analysts.

This expansion in the European and other fast-growing generic markets, should help Indian players offset rising input costs and the well-documented pricing pressure in the US generics markets.

The healthcare index has, however, gained barely 5.5 per cent over the past three months compared with 10 per cent rise in the Sensex.

This under-performance is largely owing to heavyweight scrips such as Ranbaxy and Cipla under-performing the market. In the case of Ranbaxy, the company is expected to grow its sales by 30 per cent y-o-y in the December quarter, thanks to its earlier acquisition of Romania-based Terapia, say analysts.

Its operating profit is also expected to surge 375-400 per cent y-o-y, helped by a low base effect in the previous year. In the September 2006 quarter, it had grown its consolidated operating profit by a whopping 540.4 per cent y-o-y, as compared to an 18.4 per cent growth in its income from operations.

Similarly, Dr Reddy's is also expected to see its sales grow by 170 per cent y-o-y in Q3 FY07 thanks to synergies with its earlier acquisition of Germany-based betapharm, while its operating profit should expand by a 700 whopping per cent.

Meanwhile Cipla, which has a low-risk partnership model in overseas markets, is expected to see its operating profit grow by 4-5 per cent in the last quarter, broadly in tune with the growth in sales.

MNC players such as Glaxo, which derive a significant majority of their sales in the domestic market, are expected to see their sales improve by 5-6 per cent in the last quarter, but operating profit is expected to grow by 45 per cent y-o-y owing to cost synergies.

The street appears to have factored in the upside for these stocks with Ranbaxy trading at 22 times and Glaxo trading at 24 times estimated CY earnings.

Dr Reddy's trades at 25 times estimated FY 08 earnings.

Grabal Alok Impex: UK calling

Grabal Alok Impex, a manufacturer and exporter of embroidered fabrics, has increased its investment in the UK-based £110-million Hamsard 2353. After an initial investment of £6.4 million for a 26 per cent stake in the Hamsard, it has put an additional £10 million for another 50 per cent stake making it a subsidiary.

The loss-making Hamsard owns 207 value-for-money garment retailing stores in the UK.

The management expects to turn around Hamsard in FY08 thanks to the company's efforts such as refurbishing existing stores, selling new products , branding and changing the sourcing to low cost countries like India and China.

Hamsard sources garments from the UK and Europe, and by changing the sourcing base, Grabal Alok will save 20-25 per cent of costs.

Meanwhile, the management expects Grabal Alok's high debt-equity ratio to considerably improve to less than one due to conversion of FCCBs and warrants into equity, generation of profits from operations and part repayment of debt in FY08.

If the stock trades at an expensive 30 times its estimated FY07 earnings, it is because analysts expect the company's earnings to grow multi-fold in FY08 and FY09.

Though the stock has picked up in the last six months giving a return of 46 per cent, it has underperformed over a year.

With contributions from Amriteshwar Mathur and Priya Kansara