Wockhardt: Right diagnosis

The launch of anti-allergic cetirizine tablets in the US will give it the early mover advantage

The stock price of Wockhardt rose by 4 per cent after the company announced the launch of anti-allergic cetirizine tablets in the US market. Cetirizine, the generic for Zyrtec brand owned by Pfizer, has annual sales of $1.4 billion.

Other companies will soon get US FDA approval to launch the drug, resulting in a crash in the prices, but Wockhardt will have an early mover advantage.

Unlike other drugs going off-patent, cetirizine has another advantage. It has moved from being a prescription product to an OTC one and this would translate into better growth and margins.

The company will distribute cetirizine, besides the 56 products in its US portfolio, through Morton Grove Pharma, a US-based generic company acquired by it in October 2007. Morton Grove, with sales of $52 million largely from dermatological products, is expected to boost Wockhardt's US sales efforts.

Wockhardt has also entered into a strategic tie-up with Leiner Health Products for distributing cetirizine to private label OTC markets.

Whereas the company has been active in the US market in the last seven years, sales from this region account for only 8 per cent of total sales for the nine-month period ended September 2007.

Analysts say the company's product development to filing process has been slow and it has products in some highly competitive segments.

Europe accounts for 59 per cent of the company's sales as it offers better opportunities, higher margins and is a relatively easier market to breach.

The company reported a 69 per cent jump in sales to Rs 738 crore for the quarter ended September 2007, largely on the back of its acquisition of France-based Negma Labs.

While the operating margins were up 230 basis points to 24.5 on account of lower R&D expenses, they were flat for the nine months ended September. At the current price of Rs 434, the company trades at 12 times estimated 2008 (December year end) EPS of Rs 36 and is attractively priced.

Maruti Suzuki: In top gear

Maruti's sales numbers for the month of December confirm that the passenger car segment remains a growth area. This segment is an exception in the automobile segment, where commercial vehicle and two-wheeler volumes were disappointing in FY08.

After a year-on-year growth of 15.4 per cent in October 2007 and a whopping 26.6 per cent in November, the December sales growth of 9.7 per cent appears slightly tepid. But that's because of Diwali purchases in November.

Even in terms of absolute numbers, the company had sold a record 65,216 vehicles in November, while December sales were lower at 62,515 units.

Domestic sales grew slower in December at 6.9 per cent, while the export growth was a robust 75 per cent. The growth in its key A2 segment, comprising Alto, Wagon-R and Swift, was low at 2.9 per cent.

The A3 segment grew by 54.7 per cent, thanks to higher SX4 sales. Maruti's sales have been an impressive 18.5 per cent for the nine months ended December 2007, with domestic sales growth of 16.7 per cent.

The A3 segment grew at the rate of 61.4 per cent and A2 segment was up by 20.2 per cent in the same period. Exports have grown by over 50 per cent this year, though they account for just over 5 per cent of the total volumes.

The higher raw material costs had resulted in a dip in Maruti's Q2 FY08 operating profit margin by a yearly 80 basis points and quarterly 150 basis points to 13.1 per cent. Going forward, the passenger car segment is going to be in the spotlight.

Steel prices are going up, and though car companies will raise prices this quarter, margins are going to be under pressure, as has been indicated by Maruti's managing director. Also, Tata Motors' small car will be unveiled next week.

The Maruti stock has been an outperformer within the sector. It grew 19.7 per cent in the first eight months of FY08 compared with 12.6 per cent in the passenger car industry. Maruti trades at about 13 times FY09 earnings, and should do well.