Nicholas: Cutting corners

Like other players, the firm is trying to cut down R&D costs.

Nicholas Piramal India, like other players in the sector, is attempting to bring down its R&D costs and focus on the core pharma business. Its board recently decided to demerge its new chemical entity (NCE) research unit into a separate company.

As part of this strategy, NPIL will separate its NCE R&D along with cash of Rs 95 crore and book value of assets of about Rs 90 crore.

This demerger is with effect from April 2007, subject to regulatory clearances. Also, existing shareholders of NPIL will be allotted shares in the new company in the ratio of 1:10 and this new entity will be listed on the bourses.

Clearly, with research related to new molecules and chemical entities involving substantial investment and risk over several years, it will also help potential new investors to decide which business they wish to invest in.

Prior to this decision to hive off its new chemical entity research to a separate company, NPIL's R&D expenses as a percentage of net sales was 5.3 per cent in the June 2007 quarter.

NPIL management in its revised guidance for FY08 has highlighted that its R&D operating expenditure will fall from an earlier projected Rs 170 crore to Rs 100 crore. The board had announced this decision on Friday, and in the last two days the stock has gained 15 per cent to Rs 288.

Earlier, Sun Pharma, had demerged its innovative R&D division into a separate company, which was recently listed on the bourses, while Dr Reddy's had hived off its R&D into a new company and had brought in strategic investors like ICICI Ventures and Citigroup.

Meanwhile, the NPIL management also expects its operating margin to reach 17.7 per cent in FY08 from an earlier projected 15.5 per cent due to this latest hiving off strategy, while its revised EPS guidance is Rs 17. The stock trades at 17 times estimated FY08 earnings.

Maruti Udyog: Impressive sales

Maruti reported an improved sales performance in August 2007, with its total sales rising an impressive 27.2 per cent y-o-y to 65,968 units.

This growth in the previous month was powered by a 28.6 per cent y-o-y rise in A2 segment (comprising Swift and Alto) sales to 41,736 units.

The stock rose 1.5 per cent to Rs 881 on Monday. In July 2007 too, the company's sales volumes had gone up 24.8 per cent y-o-y to 57,909 units, helped by improved offtake in the A2 segment.

The A3 segment is also posting strong growth thanks to the recently launched SX4 model""volumes in this segment, which also includes Esteem and Baleno, grew 70.6 per cent in August.

Sales growth in July and August has been better than the June 2007 quarter, when the sales growth was 17.1 per cent. As a result, sales, so far this year, have grown at 20.7 per cent. Analysts also point out that discounts at dealer level are prevalent in only some of the older models.

Analysts say that the passenger car segment is fastest growing in the auto industry, and Maruti is likely to grow at double-digit rates for this year and next. At Rs 881, the stock trades at about 13 times estimated FY08 earnings.

GDP: Above expectation

Since Friday, stock market players have had one more reason to cheer""the GDP data released on Friday was above analysts' expectations.

At a growth of 9.3 per cent in Q1 FY08, the growth is higher than 9.1 per cent in the preceding quarter, but lower than 9.6 per cent a year ago. Analysts had estimated the growth at 9 per cent or lower for the June 2007 quarter.

Compared with March 2007 quarter, growth in services sector improved from 9.9 per cent to 10.6 per cent, and resulted in better growth than in the Q4 FY07 despite slower growth in industry.

Industry grew at 10.6 per cent in Q1 FY08 compared with 10.6 per cent in the March 2007 quarter. Within industry, the growth in manufacturing and construction slowed, while that in mining and quarrying, and electricity, gas and water supply improved. Agriculture growth was at 3.8 per cent, the same as in the March quarter.

The increase in lending rates is yet to start making an impact on the index of industrial production. In April and May, the IIP grew at 12.4 per cent and 10.9 per cent respectively, though growth was lower at 9.8 per cent in June 2007.

For the quarter ended June 2007, IIP growth stood at 11 per cent, compared with 12.5 per cent in the March quarter. Thus growth in manufacturing, which has been one of the key drivers of the economy so far, could be slower in the June quarter, and analysts expect it could be lower subsequently.

The appreciating rupee will also slow down GDP growth going forward. Though there may be another interest rate hike of 25 basis points this financial year, economists maintain a GDP forecast of 8.5 per cent in FY08, which is the same as RBI's estimate.