Since the stunning collapse in May, markets have staged an equally remarkable recovery. From their lows, the Sensex and the Nifty have gained more than 50 per cent over the last six months, clear proof that large-caps are back with a bang.
While the nature of the rally appears to suggest that the bull party has been secular in nature, some stocks from the pharma space stand out, not so much for their ability to outperform the broad index, as for their inability. In this context, we train the spotlight on two leading pharma MNCs — Glaxo and Aventis — on which we have been consistently bullish and analyse what is in store for them.
Glaxo
For the September quarter, Glaxo's numbers were distinctly dull, with the pharma business growing by under 3 per cent. Admittedly, there were issues surrounding supplies from both a contract manufacturer in India and its parent that impacted sales performance. Some of the sales are likely to get reflected in the ongoing quarter.
A snapshot of the nine-month performance should provide a better picture. Sales of the pharma division grew by a tad less than 10 per cent, which is still lower than the overall market growth of about 20 per cent (Source: ORG; year up to September). Chronic categories have driven growth, and Glaxo's strengths in mature therapy areas have not kept pace with the market.
However, in spite of having to contend with a slowdown in topline, the margin picture continues to be pleasing; for the pharma business, margins actually inched up by over a percentage point.
Also, with the divestiture of the animal health business (effective from August 1), the overall margins improved marginally, as the former business was not as profitable as the mainline pharma segment. Adjusted for the nine-month period, the profit growth stood at 16 per cent.
In our view, it would be premature to write off Glaxo on the basis of a blip in performance in one quarter.
The current calendar may not turn out to be a great one for the company, but over the next couple of years, we expect a comeback. For starters, one can expect product launches from the parent's pipeline, specifically in the vaccines segment (in the next calendar), which holds significant potential.
Glaxo also has ambitious plans to treble revenues over the next nine years, and, to this end, it is trying to plug the gaps in its therapeutic portfolio by entering into in-licensing agreements to leverage the size and spread of its sales force. As sales from price-controlled products diminish over time, we expect acceleration at the operational level.
With the disposal of the animal health business, Glaxo also had adequate cash on hand to either pursue inorganic growth opportunities or reward shareholders with a handsome dividend, as it has done in the past.
We believe that the stock's near-term movement would be range-bound in the absence of key catalysts (unless the proposed New Pharma Policy is significantly beneficial to MNCs). Investors can retain their holdings; fresh exposure can be considered on any declines linked to broad market trends. The stock trades at about 23 times its expected per-share earnings for calendar 2007.
Aventis
The stock has been our top pick from the MNC pharma space for quite some time. The stock is a good 20 per cent off its price since our last `buy' recommendation in April, just before the market cracked. While the market has recovered, Aventis has not. We see the correction as a good entry opportunity, with valuation at about 17 times the expected per-share earnings for 2007 not all that demanding. Buy into the stock in small lots with a medium-term perspective. In the nine-month period ending September, domestic sales were up 16 per cent, broadly in line with overall market trends; export sales were down by about 9 per cent.
Coupled with an increase in costs, operating margins declined by about 120 basis points to 27 per cent. Earnings growth for the period is at a good 25 per cent.
Aventis' product portfolio focusses on chronic therapy areas such as diabetes, cardiology and oncology. There have been no product launches from the parent's pipeline for some time now, but we believe we see more of it over the next couple of years.
All products launched from the global pipeline have been routed through the listed entity; we believe this will continue, given the marketing strengths of Aventis, though any launch through the unlisted entity would sharply hurt stock sentiment.
Within the MNC universe, Aventis has a good outsourcing story in its business model, as it exports products to companies within the group (CIS region).
Exports have fallen for a few quarters now, but we expect a rebound in the quarters ahead. Commencement of exports to other locations cannot be ruled out and this could act as a kicker for the stock.