Healthy run

MNC pharma stocks enjoy better valuation

Multinational pharmaceutical stocks have been in vogue for several months and have comfortably outperformed the Sensex and BSE's Healthcare index. For instance, GlaxoSmithkline Pharma has gained almost 30 per cent over the past two months compared with a 6.9 per cent rise in the broader market.

Aventis Pharma, too, has gained almost 16.1 per cent during the period. Domestic players such as Dr Reddy's and Sun Pharma have seen only a 9.8 per cent and 6.2 per cent rise in their stock prices respectively. Meanwhile, the BSE Healthcare has remained more or less unchanged during this period.

Investor interest in MNC stocks has resulted in Glaxo trading at almost 33 times estimated CY05 earnings, while it is 28.3 times estimated November 2005 earnings for Pfizer India. In contrast, Sun Pharma trades at about 25.8 times 2005-06 earnings, while Cipla trades at about 27 times.

Analysts highlight that investors are willing to give a higher discounting to MNC players because of the possibility of products from their parents' portfolios being introduced in the domestic markets. Also, MNC players have a more efficient supply chain and marketing network compared with their local peers.

Nevertheless, the fact remains that launches from the parent's portfolio have been quite scarce. Analysts expect these companies to introduce new molecules only over the next three to four years as international medication has to be often localised to suit the Indian market.

Instead, players such as Glaxo have been largely focusing on leveraging domestic R&D skills and also licensing other companies' products in the domestic market.

While MNC pharma has shown signs of sales growth in the last quarter after several quarters of sluggish growth owing to the VAT imbroglio, it does appear that the Street has factored in this growth potential.

CDs: current flavour

Banks have been selling certificates of deposits (CDs) aggressively in the past few weeks, and at unusually high interest rates.

The one-year instrument, which generally carries a spread of about 30 basis points over one-year gilts is going at spreads of 100 basis points these days. Rates on commercial paper, which follow CD rates, have also risen.

As retail deposits are coming in a trickle, CDs are an alternative source of funds for banks. As on November 11, incremental bank credit stands at Rs 3.06 lakh crore against deposits rising about Rs 3.2 lakh crore over previous year.

Along with fewer issues of corporate bonds, the aggregate corporate bond investments of the banking sector has fallen by Rs 12,432 crore between March 18 and November 11.

The corporate sector, which is in need of funds, is turning increasingly towards bank credit. For banks, CDs have worked out cheaper than wholesale deposits by almost 75-100 basis points in the past.

But with CD rates going up so much, the gap between the two has reduced to an unhealthy 25 basis points, considering that CD rates should be lower as they are liquid.

Banks may also be making their liquidity position stronger before the December quarter, and fears of the impact of IMD as well as advance tax payments.

There has not been any change in the interest rate of longer tenure papers and this increase in the one-year corporate bond has resulted in flattening of the yield curve. While CD investors are making merry, this discrepancy is unlikely to last too long, say market players. Corporate borrowers, on the other hand, will have to pay a higher interest rate.

Patni: underperformer

Patni's ADS did not get any premium to the domestic price on issue at $20.34 (Rs 940 for two shares), but the ADS managed to gain 10 per cent on listing by the end of the day. Competitors Infosys and Satyam trade at a 22 per cent and 17 per cent premium respectively.

Patni plans to invest the issue proceeds of $104 million (plus greenshoe up to $21 million) mainly in development of new infrastructure. Patni has said earlier that it intends to grow inorganically, so it may also use this reserve to fund acquisitions.

In November 2004, it had acquired Cymbal Corporation, US for $68 million. Besides bringing more visibility and cash, Patni's ADS listing will also help private equity investor General Atlantic to divest some of its ADS holdings through a secondary offering.

General Atlantic, Patni's largest shareholder, had invested Rs 276 through ADS in 2002. With a lacklustre financial performance in the past year, the stock has been an underperformer. In this quarter till December 9, the stock has gained 13 per cent compared with Infosys' rise of 21 per cent.