UB: A heady brew

UB's open offer is unlikely to be the last word in the Shaw Wallace takeover.

The United Breweries (UB) group is making an open offer for 25 per cent of Shaw Wallace & Company (SWC) at Rs 250 a share, which works out to a valuation of around Rs 1,200 crore for the entire company.

However, since the public holding is around 15 per cent, and the institutions, including foreign institutional investors, hold another 30 per cent or so, the acquirers will also have to get the institutions to sell.

Of course, if the idea is to keep SWC out of the clutch of other rivals, even a 10 per cent stake can be a thorn in the flesh.

In addition to the liquor business""- which boasts strong brands such as Royal Challenge ""the UB group also gets half of the SWC-SABMiller joint venture, although it is possible that they will get cash if SABMiller chooses to buy them out. Incidentally, this JV has about 35 per cent of the beer market.

SWC is estimated to have a 22 per cent of the organised India made foreign liquor (IMFL) market. SABMiller had paid Rs 625 crore for its 50 per cent stake in the joint venture.

Although SWC's balance sheet is no great shakes, it does have great potential. With drinking habits in developed markets changing and there being more takers for wine, markets like India are very attractive.

Around 50 per cent of the population is in the early twenties and per capita consumption is very low.

So, it would not be surprising if a couple of other players especially foreign liquor companies throw their hats into the ring.

In the bargain, shareholders of SWC may actually get a better price, because the UB group should have no compunction about paying well above fair value for a chance to gain a commanding share of the business in India.

ABN Amro -US and Indian yields

The ABN Amro Economics Team has brought out a study of Indian and US 10-year bond yields which indicates that Indian bonds may well be a hedge against exposure to the US bond market.

A rolling correlation of 10-year Indian and US bond yields over 1997 to 2005 shows that the periods of high correlation coincide with periods when yields are falling and the low correlations coincide with periods when yields are rising.

In other words, Indian and US yields move together when US yields decline, but move differently when US yields rise. When yields in the US rose, Indian yields either rose by a much smaller proportion or fell.

The authors of the report attribute the positive correlation to high global liquidity. This liquidity, which drives down US rates, induce interest-sensitive inflows into the Indian market, including Indian corporate borrowing in international markets, FII inflows and the carry trades of hedge funds.

The resulting domestic liquidity drives Indian rates down.

When US rates rise, however, that's a sign of slower US earnings going forward. The response is to "overweight markets that are less leveraged to the global economy."

The upshot: inflows into Indian equities accelerate and offset outflows. This adds to domestic liquidity and either pushes yields down or keeps them in check. The point is that higher US yields are not likely to push up Indian yields.

The corollary is that higher US interest rates will not affect FII flows to the equity markets. That's a very different conclusion from the oft-cited fear of higher US rates leading to retrenchment from emerging markets, as happened in 1994.

GSK sets up vaccine facility

GlaxoSmithkline Pharmaceuticals is setting up its first vaccine facility in the country at Nashik. This production facility will be located next to the company's existing plant and as they would be able to leverage existing facilities, investment for the vaccine foray is estimated at Rs 60-70 crore.

Vaccines sold by Glaxo in India are currently sourced from their operations in Belgium. The domestic vaccine market is estimated at Rs 300 crore and is growing at about 20 per cent every year.

Vaccine production initially involves a large capital investment but once the the production facilities are operational, the workforce required to ensure optimium capacity utilisation is not very large. Hence margins for vaccines are estimated at 25 - 30 per cent.

Meanwhile, the Indian vaccine industry is fast emerging as a global hub for producing vaccines. Why has this development taken place ?

Analysts point out that in developed markets, pharma companies are phasing out production of vaccines as the cost is just too high, at a time when numerous categories of vaccine have seen a fall in their prices.

Indian companies are projected to supply about 90 percent of the global measles vaccine supply in the near future.

Companies are also looking at moving up the value chain in the segment - a senior Glaxo official pointed out that the company is working on developing human papiloma virus for preventing cervix cancer, while DNA rabies vaccines are under development by several companies such as Indian Immunologicals and Bharat Biotech.

Clearly vaccines are emerging as the next growth story for the domestic pharmaceutical industry.

With contributions from Shobhana Subramanian and Amriteshwar Mathur