Pep pill

P/Es of local generic drug firms are higher than those of global peers

With generic pharmaceutical stocks reporting a sharp jump in prices over the last few weeks, once again attention has shifted to valuations of large Indian players versus their global counterparts.

For the top three, Ranbaxy Laboratories trades at a trailing 12-month P/E of 65, Cipla gets a discounting of 40.45 times and Dr Reddy's Laboratories is at 69.6.

In contrast, overseas players such as Israel's Teva Pharmaceuticals trade at a discounting of 26.65 times on a trailing basis. US-based Watson Pharmaceuticals has a P/E was 23.85, while Mylan Laboratories also from the US, trades at 35.5 times.

Analysts at domestic brokerage houses are not expecting pricing pressures in the US generics markets to ease off in the forthcoming March 2006 results.

Then why do Indian generic players get a higher discounting than their global peers? The overwhelming consensus among analysts is that Indian players are expected to significantly improve their profits and operating margins over the next few quarters, thanks to their expansion in fast-growing generics markets via recent acquisitions, exclusive marketing agreements and the cost-cutting steps implemented, such as sharing R&D costs.

Also, several molecules such as Pravachol and Zocor (medications to reduce blood cholesterol levels), and Allegra (an anti-allergy drug) are expected to go off-patent in the next year.

As a result, generics companies could have a market opportunity of over $20 billion. But the market could be expecting too much given the pricing pressure and the high cost of litigation, and most analysts are advising investors to exercise caution.

Steel Prices

Domestic steel prices have been hiked twice in the past two months, with the latest being the Rs 2,000 a tonne increase in HRC prices. Clearly, steel players that are not integrated have been grappling with rising inputs costs of iron ore for some time.

But with demand once again on the rise from user industries in India and China, the smaller players are able to pass on higher raw material costs easily. Plus, if the Indian government cuts down iron ore exports, the smaller players are likely to benefit further.

Of course, integrated players such as Tata Steel and SAIL will be able to leverage the price hike given their captive sourcing of iron ore.

Of equal importance are steps being taken by China to consolidate its steel making industry. It is understood that the number of importers of iron ore in China has been cut by about 75 per cent over the last few months, as the government is keen that the top ten players should control the majority of the market share.

As a result, steel stocks seem to have come out of their coma and have shown a sharp rise over the past few weeks. Tata Steel went up about 25.81 per cent over the past five weeks compared with 14.2 per cent gain in the Sensex, while SAIL rose 27 per cent during this period.

Tata Motors: Rolling on

Though Tata Motors' sales figures for March 2006 are quite solid, the full-year numbers remain disappointing. Sales of medium and heavy commercial vehicles increased 15.82 per cent y-o-y to 17,348 units in March.

In February 2005, the growth had been much higher at almost 20 per cent but that was an exception after the Supreme Court decision banning overloading of trucks.

After a 25.71 per cent growth in FY05, Tata Motors' M&HCV sales for 2005-06 at 1.2 per cent look rather small. But compared with 6.2 per cent y-o-y decline in the first nine months, the fourth quarter has saved the day as the segment has ended the year with a small but positive growth.

The cars segment has also not done as well as FY05 when it grew 25.71 per cent. But compared with Maruti's sales growth of under 5 per cent in FY06, Tata Motors' car sales are better, growing at 10.83 per cent for the year.

The LCV segment grew a whopping 88 per cent in March and was the fastest growing segment with a 45.56 per cent growth for the full year.

Despite sluggish growth rates compared with FY05, the Tata Motors stock price has more than doubled over the year, with about 75 per cent of the gain coming in the past four months.

With strong freight rates and the overloading restrictions, analysts expect truck demand to remain strong. LCV Ace is a winner, and the Budget sops on Indica have also led a re-rating for the stock in the recent past.