Wockhardt: Nutritional buy

The acquisition of Dumex India will add value to Wockhardt's portfolio

Though Wockhardt has been scouting for foreign buys, it has not been able to fructify any acquisition since it bought Germany-based Esparma in May 2004. On Friday, it announced the acquisition of Dumex India.

Dumex has two leading brands Protinex and Farex in the nutrition segment, with revenues of Rs 60 crore. Besides these two brands, Dumex will also provide technical assistance to Wockhardt for manufacturing two specialised sugar-free infant foods.

A few years ago, Dumex had acquired Protinex from Pfizer and Farex from Heinz but its parent, Royal Numico, has now decided to exit from India to focus on China and other markets.

While Wockhardt has not revealed how much it has paid, analysts say domestic brands are unlikely to go for more than one-time revenues, as margins are not likely to be high.

The acquisition fits well with Wockhardt's strategy to increase its presence in the nutrition business, where it is a market leader with 15 per cent share.

Wockhardt has Dexolac, Nusobee and First food brands in the infant nutrition segment, and with this buyout, the turnover of this segment will double to Rs 120 crore, or about 8.5 per cent its CY05 revenues.

With its financial muscle, Wockhardt can market brands better, and show higher growth. Protinex is growing at 20 per cent a year.

In the June 2006 quarter, Wockhardt's operating profit had increased by 15.2 per cent to Rs 68.9 crore on a sales growth of 13.4 per cent.

Operating profit margin went up by 30 basis points to 19.6 per cent. But owing to write-offs in its US business and due diligence expenses on account of a foreign acquisition, it made a loss of Rs 3.7 crore. The Wockhardt stock trades at a reasonable 16 times CY06 EPS.

PSL Ltd: Piping hot

PSL Ltd, the Rs 1,556 crore manufacturer of specialised pipes such as spirally welded steel pipes, has once again benefited from the upturn in the oil industry, coupled with a reduction in price of key inputs such as steel.

The company's consolidated operating profit has grown 48.46 per cent y-o-y to Rs 137.27 crore in FY06 compared with 7.1 per cent growth in net sales. It sales growth in FY06 was affected by 17.9 per cent drop in net sales to Rs 468.78 crore in the March 2006 quarter.

Senior company management said as the company is implementing several projects, booking of revenues for each project depends on the schedule of implementation.

In FY06, PSL's raw material costs as a percentage of net sales, declined 149 basis points y-o-y to 67.67 per cent.

Senior management pointed out that to keep input costs under control, they started sourcing the entire steel requirements at the time of receiving an order. Prominent orders won by the company in FY06 included that of a Rs 240 crore contract from GAIL.

Consolidated operating profit margin rose 244 basis points to 8.8 per cent in FY06. The management said the current outstanding order book amounted to Rs 1,500 crore. In the March 2006 quarter, the company's operating profit margin fell 76 basis points y-o-y to 6.16 per cent.

PSL had earlier arranged funding of almost Rs 320 crore, which included a private placement at Rs 252 a share, to finance its expansion.

The company plans to ramp up capacity of its two steel pipe making capacity mills in Vizag by 75,000 tonne each.

In addition, the management highlighted that PSL has already completed a 300,000 tonne expansion in its steel pipe making capacity at Kandla.

With the stock trading at about 17 times diluted trailing 12-month earnings, the street appears to have discounted PSL's growth prospects.