Getting the timing right

Titan's NCDs are virtually free for investors

The Titan stock has gained 60 per cent in the past three months against the Sensex gaining 8.89 per cent, as the stock market's fancy for the retail sector does not abate.

The company has announced a Rs 126-crore capex plan to fund the expansion of its retail chain as well as enhance its manufacturing facilities.

The company has announced a rights issue of partially convertible debentures (PCDs) of Rs 600 each in the ratio of 1:20. Part A of the instrument comprises one share to be converted at Rs 350, while Part B is a non-convertible Debenture of Rs 250, earning a coupon of 6.75 per cent per annum and with a tenure of five years.

At just five per cent, the extent of dilution is small, so the rights issue is not likely to have much impact on the stock price. Thus, if the rights shares were to be sold after the issue, the investor would make more than 100 per cent and that money could be could be used to fund the NCD. In other words, the NCD is virtually free.

At the current price, the stock trades at around 30 times estimated FY07 earnings and is not cheap. The stock has seen a re-rating because of an improvement in its financial performance. Net sales were up 34 per cent in the firt half of FY06 while its operating profit was up 110 per cent.

Pre-tax margins for the first half of FY06 were up 860 and 330 basis points for the time products and jewellery division respectively.

The jewellery division has been growing at over 25 per cent in the last five years and with the proportion of gem-studded jewellery increasing, margins should improve further.

The company has also diversified into sunglasses, and is also pursuing more investments in the precision engineering business, which caters to the aerospace and automotive industry.

Given the favourable demographics and strong consumer demand, the potential for growth of branded products is huge.

Pharmaceutical industry

While foreign acquisitions and contract manufacturing partnerships made the big news in the pharmaceutical industry during 2005, the industry remained troubled by the pricing pressures and difficulties in winning patent challenges in the US generics market.

Going forward, the US generics market is likely to remain as slippery in 2006. The impact of this deteriorating operating environment was visible in Ranbaxy's nine-month operating margins for CY05, declining 1472 basis points to 7.7 per cent.

As a result, in the new year, there is a clear need for Indian generic players to build on the initial steps taken to stabilise operating margins, such as sharing R&D costs with venture capitalists or partnering with foreign players in overseas markets.

Clearly, contract manufacturing, with steady returns of typically 12-15 per cent, is one segment where domestic generic players could use to grow topline and margins.

For instance, Dr Reddy's custom manufacturing business is estimated at $10 million (about Rs 45 crore) or approximately 2.8 per cent of FY05 net sales and the company is keen to expand this business to $100 million in the medium term.

Also, in the new year, Indian generic players would once again need to focus on diversifying their presence in the fast-growing generic markets in CIS countries and continental Europe, in a bid to counter pricing pressures in America.

Domestic sales of medications have shown signs of reviving in the September quarter after almost a year and there is increasing consensus that this trend will gain strength in the new year.

Of course, the key beneficiaries of this trend are going to be the MNC players and some domestic players like Cipla and Sun Pharma.

The much talked about medications being introduced by MNCs in the domestic market from the parent's portfolio have shown signs of taking off in CY05. Going forward, MNC arms of pharma companies are expected to take expand the scope of their Indian operations.

And given the growth opportunities in the domestic market, it also makes sense for Indian generic players to enhance their presence in this fast growing market segment.

With contributions from Shobhana Subramanian and Amriteshwar Mathur