Banking on brands for growth

PENNY WISE

Strong brands in the domestic market and global alliances will ensure a 20 per cent growth for Elder Pharma.

Pharmaceuticals are considered to be a growth area in India, with a large population and skills in research and development. Just the right environment for companies like the Mumbai-based Elder Pharma, operating in formulations, bulk drugs and consumer products, to expand its presence in the domestic market.

If Elder's overseas forays gather speed it could open up new opportunities for the company. Alok Saxena, director (international), says, "We hope to maintain a 20-25 per cent growth per annum over the coming years."

So far, Elder seems to be making the right moves. Currently, the company has licenses from about 25 international companies to sell their products in India. The licenses from international players, analysts say, is not important just because of the potential it holds in terms of domestic sales.

"These licenses could lead to contract research and manufacturing service (Crams) agreements in the long-term," says a recent report by domestic broking firm, Sharekhan.

Analysts feel that the company's strength lies in its sales reach in India, which is helping it in becoming the manufacturing and marketing partner of foreign companies in the country. Going forward, too, re-organisation of its sales force would push the new products and drive growth.

On the manufacturing side too, Elder is making investments in increasing capacities. The company has four manufacturing facilities near Mumbai in Maharashtra, including the recently purchased undertaking for manufacture of injectables in liquid oral dosage from Elder Projects.

And now, it is setting up three more plants in the tax havens of Uttaranchal and Himachal, which would give it a seven-year excise duty benefit, along with octroi exemption, according to Saxena.

While the new capacities would reduce the company's dependence on outsourcing and thus control costs, there would be increased depreciation cost due to greater investments in plant and machinery. The move would also improve cash flows.

According to Sharekhan, operating profit margins are likely to improve from 14.7 bps in FY05 to 20.3 bps in FY08. Although the company is not into backward integration of making empty capsules or injections, it has got into manufacture of some raw materials for its formulations. Captive consumption of bulk drugs and launch of higher-margin products will also add to the bottomline.

Currently, the company's areas of business include formulations, bulk drugs and consumer products. Within pharma formulations that account for over 75 per cent of its sales, Elder's areas of operation are women's health care, nutraceuticals and some areas in the cardiovascular segment.

One key driver of growth for the company is Shelcal, which is a calcium supplement. This product commands a market share of 29 per cent and competes with products from Glaxo and Novartis. Its other popular brands are Tiger Balm and Chymoral.

It has a market share of six per cent in the former and competes with Zandu and Paras Pharma, while it has a market share of 32 per cent in the latter and competes with Glaxo and Nicholas Piramal.

The contribution of Shelcal, Chymoral and Tiger Balm to the total revenues is 25 per cent, eight per cent and four per cent, respectively. Besides, the company has a good presence in the consumer product segment in the form of the skin care brand, Fairone.

From a small formulation company in 1987, Elder is now spreading its wings in the export market. Saxena says that the company has identified a plant for acquisition in Ghana in Africa and is also on the lookout for further organic and inorganic growth opportunities in other parts of the continent. Its other target areas are the Middle East and CIS countries.

At present, exports account for less than five per cent of its total revenue. "Till now exports have been primarily in the form of contract manufacturing for foreign players but in future we are planning to export our own brands as well," says Saxena. Thus, the company expects exports as a percentage of total sales to increase to 10-12 per cent by FY09.

According to analysts, the outlook is good for companies which are into OTC drugs in India. Elder plans to launch many new molecules and line extensions. Its bulk drug sales are expected to pick up from FY07 onwards as it starts producing 12 products in the anti-bacterial range.

It has also launched three new products recently, viz., Somazina (under license from Ferrer and used in central nervous system applications), Tanatril (under license from Tanabe Seiyaku and used as an ace inhibitor) and Tobraneg (under license from Eli Lilly and used as an anti-bacterial). These are expected to boost sales in FY07 and FY08.

Elder got a license earlier this year to sell UK-based Medichem's anti-bird flu spray in India. The company has introduced it on trial basis on poultry farms affected by the virus.

Saxena says, "This preventive drug has shown good results in the country. In several cases the poultry mortality rate came down from 100 birds to about 5-6 birds." Saxena says that the company has launched the product commercially in May this year.

Going forward, good domestic formulations business, new products in the child health care and cardiovascular segments and international business would drive growth. The company has filed for two process patents with the US FDA and analysts expect at least 9-10 months before an approval is received.

Again, analysts say that net sales growth of 20 per cent per annum over the next couple of years is achievable. But, Saxena adds that any changes in DPCO norms could adversely affect most players in the industry, including Elder. 
 

FINANCIALS
(Rs crore)	FY06	FY05	% Change
Net sales	350.83	285.35	22.95
Operating profit	63.02	41.89	50.44
OPM (%)	17.96	14.68	-
Net profit	37.74	20.39	85.09
EPS (Rs)	21.60	12.73	-
P/E (trailing 12 months)			14.26x

For FY06, the company posted a 23 per cent growth in net sales to Rs 350.8 crore. Its operating profit over the same period increased 50.44 per cent to Rs 63.02 crore, while the net profit has grown 85.1 per cent to Rs 37.74 crore.

According to Sharekhan estimates, the company could clock earnings per share of Rs 28.4 for FY07 and Rs 38.2 for FY08. Thus, at the current price of Rs 308, the stock trades at 10.85x and 8.06x, respectively.

On trailing 12-month earnings, the stock trades at 14.26x and compares favourably with Unichem (10.16x), Alembic (11.74x), GSK Pharma (25.52x), Novartis (12.74x) and Nicholas Piramal (23.41x).