VSNL: Hint of undervaluation

The worst has already been priced into the VSNL scrip

VSNL will receive Rs 786 crore or Rs 28 per share as consideration for the sale of its stake in Intelsat Ltd, but since the news was out the stock has risen by less than Rs 10.

Incidentally, VSNL's free cash flow in the whole of FY04 stood at Rs 743 crore. One would have imagined investors to be more excited about the huge extraordinary income.

At the current market price of Rs 167, VSNL trades at less than its book value of Rs 181 per share. Moreover, after including the cash consideration from the Intelsat sale, cash on VSNL's books amounts to around Rs 128 per share.

The stock is indeed going cheap, and this has to do with the poor show of its international telephony business. Both realisations and retention rates have been falling rapidly in the ILD market, and this has hurt VSNL the most.

But VSNL has done well to increase the proportion of non-ILD services, which are not only growing at a fast pace, but have better margins. These services accounted for 23 per cent of revenues last quarter and 41 per cent of segment profit.

In the June quarter, even the performance of the ILD segment picked up, and as a result, overall profit before tax and exceptionals jumped 110 per cent to Rs 195 crore.

Things may not be as glum as the stock price suggests.

Drug prices

Competition is normally the guarantee of cheap prices for most products, but that may not necessarily work for the pharma industry. The difference between wholesale and retail prices of drugs is found to be over 30-50 times.

That's why Ram Vilas n decision to ask drug makers to reveal the production cost of a medicine on the label, in addition to the current practice of printing maximum retail price, may not be as unreasonable as it sounds.

A study conducted by the National Pharmaceutical Pricing Authority of India (NPPA) reveals a stunning reality. While the wholesale rate of many generic drugs, for instance Nimesulide (100 mg), the pain killer, is Rs 1.20 for a 10 tablet-strip, its retail price ranges between Rs 21 and Rs 30. The same drug, when sold as a branded generic, is priced at Rs 38.61 (Nise, a Dr Reddy's brand) for 10 tablets.

A retail chemist buys Cadila Healthcare's Nimfast for Rs 1.76 and sells it at Rs 24 and Cipla's NICIP/Nimesulide 100 mg tablets for Rs 2 and sells them at an MRP of Rs 25. Similarly, a retail chemist buys Cetrizine (10 mg strip), used to treat colds, for 80 paise and sells it at a retail price of Rs 26.

The retailer gets away with the high prices because consumers have a low level of awareness when it come to medicines.

Since prescription drugs cannot be advertised, manufacturers put a high retail price for their drugs, essentially so that retailers have a high margin and an incentive to push their products. If the industry does not want direct price control, a more rational pricing policy may be a better option.

'Absolute' slip in exports

Although exports for July grew at a year-on-year rate of 18.81 per cent, the absolute figure, at $5.4 billion, was lower than June's exports of $5.7 billion. The July exports were also lower than exports in May, which totalled $ 5.8 billion. Although it's too early to be sure, there does appear to be the beginnings of a slowdown in exports.

Similarly, imports too, at $7.4 billion in July, were lower than the June figure of $7.9 billion, and the May figure of $ 7.7 billion.

The effect of the sharp rise in crude oil prices is clearly visible from the data on oil imports. These amounted to $9.9 billion, a third of which was the oil import bill for July alone. Oil imports were $2 billion in June and $2.4 billion in May.

Clearly, July has been exceptional, and with prices shooting even higher in August, the impact on the trade balance and on the rupee is obvious. Small wonder that the trade deficit rose dramatically from US $ 5.9 billion for the period April to June 2004 to US $ 8.5 billion for the period April to July, moving up by $2.6 billion in one month.

In the month of June the trade deficit moved up by $2.1 billion. Non-oil imports, which are widely held to be an indicator of industrial growth, amounted to $4.7 billion in July, well below the June figure of $5.8 billion and the May data which showed non-oil imports at $5.4 billion.

In the last few months, we have accordingly seen lower exports, higher oil bills, lower industrial growth and a deteriorating trade balance, despite what the year-on-year figures tell us.

With contributions from Mobis Philipose and Rumi Dutta