Reliance Surprises

Reliance Industries

The global petrochemical scenario has only worsened after the south East Asian crisis with global commodity prices falling sharply. But Reliance has still managed to record a 10 per cent rise in net profit at Rs 921 crore for the first half ended September 1998. Sales grew 16 per cent to Rs 7,374 crore. This is mainly on account of strong volume growth of 32 per cent and the benefits accruing from the higher degree of backward integration. Production rose 47 per cent to 3.45 million tonnes in the first half of 1998-99. But its average product pricing declined 16 per cent.

Volumes in the polyester business (PFY, PSF and PET) increased by 31 per cent to 280,000 tonnes. The industry, however, operated only at 80 per cent capacity while Reliance operated at full capacity. Its volumes in the intermediate business (PTA and MEG) were up 61 per cent to 636,000 tonnes. Reliance's plastic business (PP, PE and PVC) reported a 19 per cent rise in volumes. Reliance has been able to improve its market share in all these segments. Market share in polyester grew from 39 per cent to 43 per cent in the first half. The same was true with fibre intermediates where the share was up from 78 per cent in the first half of 1997-98 to 81 per cent in 1998-99 and the share in plastics rose from 58 per cent to 61 per cent.

Strong domestic demand has been the major factor behind its volumes. It is for this factor that Reliance sold 96 per cent of its production in the domestic market itself, where tariff barriers afford a protection on an average of about 17 per cent. Analysts say that domestic demand is expected to grow at least by 15-20 per cent for the next two years. Thus, as long as Reliance can use the domestic market to hedge itself from global fluctuations, it will be able to sustain its performance.

Operating profit margin improved to 19.6 per cent from 19.1 per cent. This was mainly on account of falling feedstock prices _ mainly naphtha and natural gas _ in the international market which helped the company in improving margins. Total expenditure grew 15.88 per cent to Rs 5,932 crore. Analysts expect pressures on operating margins to continue in the short term as supply outstrips demand globally. However, cancellation or delay of several projects in Asian countries may lead to restoration of demand-supply projections which have seen prices recover in the last two months.

Interest cost increased by 46 per cent to Rs 347 crore. Higher interest cost was mainly on account of the commissioning of 17 plants at the Hazira petrochemical complex, which also saw its depreciation increase by 32 per cent. Its annualised EPS now stands at Rs 19.6. However, Reliance share prices have been under severe pressure after the results and has declined by around 39 per cent to Rs 107. This is mainly on account of some FIIs moving out of the stock.

Crompton Greaves

Crompton Greaves (CG) is one of the victims of the slowdown. Its performance has witnessed a declining trend since the previous year with margins under constant pressure.

CG's business division is divided among four business groups; industrial systems, power systems, consumer products and the digital segment. Sales for second quarter stood at Rs 371.38 crore (earlier quarter figures not mentioned). The industrial and power systems divisions which nearly contribute 68 per cent of the turnover are facing a sluggish growth. Despite this, the company has posted better OPM at 10.25 per cent for second quarter 1998-99 against 7.2 per cent for the year ended 1997-98. The net profit margin has inched up to 1.9 per cent during the second quarter against 1.3 per cent of the whole of previous year.

In order to combat the domestic slowdown, CG plans to focus on exports. Exports for last year were nearly 13 per cent of the turnover. Any pick up in the business divisions of CG would be in link to the overall economic growth rates. One of the major flaws of CG is its investment in a number of group companies as on March 1998 to an extent of Rs 138 crore with six of the fifteen companies still making losses. That too when its borrowing has ballooned at Rs 614.73 crore while its business of industrial and power systems is working capital intensive. This is one of the reasons that CG receives a very low discounting on the bourses. It had recently touched a low of Rs 23 on the bourses and is looking up. The stock trades at a low price currently with no signs of any recovery on the anvil, and buying above Rs 25 levels would not make sense.

Knoll Pharma

Knoll Pharmaceuticals declared its results for the third quarter September 1998. It recorded sales of Rs 70.73 crore while net profit stood at Rs 10.50 crore. Sales for the previous year ended December 1997 stood at Rs 243.84 crore. Knoll's products are stated to be posting good growth rates. Thus the company's topline growth stands comfortable. Its main products are Brufen and Digene besides Prothiaden and Cremaffin are its other products. It launched Clivarine, an anticogulant low molecular weight heparin preparation used for the prophylaxis of deep vein thrombosis last year. The product is expected to pick up in the current financial year.

The company stands cash rich after sales of its two brands last year. Burnol and Coldarin for Rs 24.48 crore. Its operating margin for the first quarter stood at 18.56 per cent against 16.29 per cent for the whole of 1997 while the net margin declined to 14.86 per cent during the quarter against the previous year's 20.5 per cent. In December 1997, its German parent came up with an open offer and increased the stake to 51 per cent ensuring further commitment towards the Indian arm.

urther, Knoll also declared a bonus in the ratio of 1:1 thereby its equity capital has doubled to Rs 16.20 crore. The company also completed its VRS scheme a year back and the benefits would accrue in the long run making it a cost-effective player. The pharma industry is currently being fancied on the bourses and Knoll around Rs 480 at a discounting of 30 is still sound considering its growth potential.

Wockhardt

In tandem with the growth in the pharma industry, Wockhardt posted 32 per cent growth in sales for the first quarter of 1998-99 (year end being June). Sales stood at Rs 152.3 crore. Exports were up by 12 per cent during the quarter at Rs 22.9 crore. On the domestic front, the formulation business grew 28 per cent to Rs 73.4 crore while fluids segment was up 48 per cent to Rs 20.8 crore. Its other divisions Agriscience and Hospitals were up 53 per cent and 13 per cent to Rs 50.6 crore and Rs 5.3 crore respectively.

Wockhardt acquired Merind in the early part of this year, thus on a combined basis, sales grew 25 per cent. The acquisition has given Wockhard a leeway into veterinary segments and certain bulk drugs. Besides Merind's acquisition would give Wockhardt an entry into the vitamin B12 segment where Wockhardt did not have any presence. Merind had recently acquired a new technology which would increase its yield thus in the long run benefiting Wockhardt.

During the period, Wockhardt consolidated its position in its brands. The company maintained its leadership status in Proxyvon, a pain killer and Spasmoxyvon, an anti-spasmodic. Besides it launched three new specialised medical nutritional products at the start of the year for use by patients suffering from diabetes, renal failure and debilitating conditions such as cancer, burns, trauma and TB enhancing its product portfolio.

Though Wockhardt has acquired Merind and Wallis in the UK streamlining its operations is the first priority to maintain its consolidation. The company aims to maintain a stable growth of around 30 per cent for the next three years. To augment its growth tempo, the thrust is on exports aimed at 50 per cent of sales in the coming years while supplementing its overall growth strategy. Acquisitions will be in focus. The Wockhardt scrip is currently trading at Rs 284 and is strong considering the fancy in pharma stocks and the aggressive strategy.