Merck Ltd


(Abhishek Basumallick) #1

I have been looking at some Pharma names recently. Let me put a disclaimer upfront. I am not very good at analyzing pharma companies. I am not able to differentiate between most of the companies who sell non-patented generic drugs in India.

Having said that, the numbers for Merck looked good. Below is a glimpse. For more detailed look, please check http://www.screener.in/company/?q=500126

Market Cap: Rs. 1050 Cr

Current Price: Rs. 630.00

Book Value: Rs. 291.36

Stock P/E: 13.34

Debt to equity: 0.00

Price to book value: 2.16

Promoter Holding - 51.8%

  • Merck Limited was set up in India as Merckâs first Asian subsidiary in 1967. The Company operates both its pharmaceuticals & chemicals businesses in the country.

  • Dec’13 (Q4) quarter net profits & EPS have gone up by 58%; Revenues are up 31.8%

  • FY12 (year ending Dec) EPS is 47.2 vs 38.4 in Fy11 (Gain of 23%)
    **
    Problem Areas**

  • Large part of the company’s revenues comes from areas under govt price control, ability to pass on input cost escalations is not there. This can severely impact margins.

  • Company has a performance materials division which makes pigments and cosmetic actives, neither of which is core to the company’s business.

Valuation

The company is likely to post a FY13 (Dec) EPS of close to 53-54. At 15 times, the stock can trade at around 800 levels, which is about 25% from current levels. So, not a screaming buy, but something worth looking into for stability and moderate returns over the short term.

Views invited.


(Excel Monkey) #2

Look at novartis India looks a lot better than Merck in terms of growth and profitability ratios


(Rohit Chauhan) #3

i have the distinction of investing in both and learning a not very expensive lesson - capital allocation skills and management attitude towards small shareholder matters a lot.

merck has generates a high return on capital , but is not re-investing the capital in the business. they may pay it out via dividend …so you are talking of low double digit returns here

novartis management is worse. they have tried to short change the minority investor by doing a buyback at a low price. in the past they loaned out a large amount of surplus cash to other group companies.

both these companies are run for the benefit of their parent and the minority shareholder is a nuisance which needs to tolerated.clearly the market has seen this and has rightly taken a dim view.


(Bhaskar Jain) #4

Thanks Rohit. Following the footsteps of Astra Zeneca :frowning: I too entered into both of these companies recently. Are there any “good” stable pharma companies trading at less than 15 P/E. How’s Merck ?


(Bhaskar Jain) #5

**

i have the distinction of investing in both and learning a not very expensive lesson - capital allocation skills and management attitude towards small shareholder matters a lot.

merck has generates a high return on capital , but is not re-investing the capital in the business. they may pay it out via dividend …so you are talking of low double digit returns here

novartis management is worse. they have tried to short change the minority investor by doing a buyback at a low price. in the past they loaned out a large amount of surplus cash to other group companies.

both these companies are run for the benefit of their parent and the minority shareholder is a nuisance which needs to tolerated.clearly the market has seen this and has rightly taken a dim view.

Thanks :)( Wyeth ?

**


(Raj Panda) #6

Hi Rohit,

Could you please explain the point i highlighted below in little more detail. As per my limited understanding, i thought buyback at low price is a good thing for shareholder who stay on ?


(Excel Monkey) #7

I had been a shareholder in novartis for around 3 years before I sold it some 6 months back (was scared of the effect of price control on novartis).

I don’t think they have cheated anyone. They did lend money to group companies on commercial terms.

I think it was you wishful thinking to think that novartis would drive its growth in India via listed subsidiary when they have been having their 100% owned operations in India since years.))


(Rohit Chauhan) #8

**

wyeth reminds me too much of novartis - high return on capital on core biz, high cash holdings with low dividend payouts (for no apparent reason). low re-investment in the biz due to which the core biz is growing at 8-10%. so one can expect around 12-14% return at best unless the business starts growing rapidly

there are better opportunities out there …isnt it ?

Thanks :)( Wyeth ?

**
**

**


(Rohit Chauhan) #9

hi raj

you are right …but the intention of the management was to take the shareholding to 90% at a very low price. At 90%, the company is close to delisting

you may want to read this - http://valueinvestorindia.blogspot.com/2009/03/getting-cheated.html – happened some time back

novartis management is worse. **they have tried to short change the minority investor by doing a buyback at a low price. **in the past they loaned out a large amount of surplus cash to other group companies.


(Rohit Chauhan) #10

ofcourse i was naive to believe that they would be fair to their indian shareholders. but after having seen them operate this way, why would i still invest with the company ?

lending to group company at market rate is not cheating, but if your cash levels is at around 40% of market cap (350 odd crores v/s 800 crs in 2009) and you go ahead and loan the cash out to group companies, what should the minority shareholder infer ?

this company makes close to 45 eps and pays 10 as dividend (no change for last 5 years) when it needs hardly any capital to grow. all that extra cash is being retained with no plans for deploying it.

In addition, the company did a buyback in 2009 at a low price, to take the shareholding to 90% (for delisting ??) - what will you make of that ?

ofcourse they are not as crude as some of the desi promoters, but if you look at the past actions, does it inspire confidence ?

i have invested in a lot of companies with good business, but not so great managements. the returns are average in the end even if the stock is cheap. cannot speak about others - but i have learnt my lesson that management matters a lot

again novartis is not unqiue - there are a lot of MNCs who work for their foriegn parent and could care less for their indian shareholder - look at the huge royalties being charged in some cases.

life is too short for such aggravations :slight_smile:

i have the distinction of investing in both and learning a not very expensive lesson - capital allocation skills and management attitude towards small shareholder matters a lot.

merck has generates a high return on capital , but is not re-investing the capital in the business. they may pay it out via dividend …so you are talking of low double digit returns here

novartis management is worse. they have tried to short change the minority investor by doing a buyback at a low price. in the past they loaned out a large amount of surplus cash to other group companies.

both these companies are run for the benefit of their parent and the minority shareholder is a nuisance which needs to tolerated.clearly the market has seen this and has rightly taken a dim view.


(Excel Monkey) #11

hi Rohit

I don’t like novartis that’s why I sold it some 6 months back.

All I was saying is that novartis is a better play than Merck in multinational pharma space.

I remember there was a lot of hue and cry made by investors that time with regards to cash. (Even reliance MF made some comments in the media. If I remember correctly)

All that died once they announced a buyback.

Well what is the right price to pay? You would agree that market price is the right price. (Reminds us of 2G)

If the sellers were fool enough to tender the stock at low valuation do we need to blame buyers for bidding a low price? ))))

Regards,

:))

I had been a shareholder in novartis for around 3 years before I sold it some 6 months back (was scared of the effect of price control on novartis).

I don’t think they have cheated anyone. They did lend money to group companies on commercial terms.

I think it was you wishful thinking to think that novartis would drive its growth in India via listed subsidiary when they have been having their 100% owned operations in India since years.))


(Rohit Chauhan) #12

Hi excel

there is a concept of fiduciary duty of the management. the same MNC management follow it in letter and spirit in their parent companies, but when it comes to indian subs - it is all forgotten.

I will still blame the buyer and call it very unethical (maybe i am in the minority on that count). the management has an information advantage over me and i have entrusted my money to them. The management can play with the results and buy me out (buyback) at a time which works for them. now if i am a lay investor and dont know better, i may think it is a good deal, but it is still unethical. would like to partner with such a person if you knew how they could treat you ?

i agree novartis may be better than merck …but then will not it be better to find a better company or maybe just hold cash ?

in the current midcap crash , a lot of companies with poor governance are getting beaten down. maybe thats a good thing for the long term !


(Raj Panda) #13

Thanks Rohit, that’s a good learning.

Link: http://valueinvestorindia.blogspot.com/2009/03/getting-cheated.html


(Hemant V Bhatia) #14

**The company held its AGM on 9thApril 2015 and was addressed by Mr. Anand Nambiar Managing Director.**Key Highlights Of AGM by Capital Mkt;

During CY 2014, while the raw material prices were slightly higher, there was tremendous competition for some of the key products of the company, which resulted in additional marketing and selling expenditure and higher other expenditure.

The company was not able to increase the prices of its products, in fact for its key Evion product; the one which caters to Vitamin E business, the company had to reduce the prices. The Vitamin segment was under pressure and sales de grew in CY 2014. All these, resulted in overall pressure on OPM and thus hit the profitability.

An up-gradation exercise was taken in Goa plant which manufactures the pharmaceutical products. The exercise started in Dec 2014 and is more or less completed as on April’15. As a result of which the production was shifted to dedicated toll manufacturing units.

The company introduced 6 different variants of existing products in CY 2014 and has further plans to introduce more in CY 2015.Management is hopeful that all the marketing and sales initiatives that it has taken in CY 2014 will help in higher sales growth and better profitability in CY 2015.

Management reiterated that there are no plans of any buyback or open offer from the Parent.


(Kushal Dakalia) #15

Just 1052 crore for entire portfolio of drugs like Concor (Yearly sales : 88 cr), Entire chemical business (Yearly sales: 350 cr), plus various other products, is way too less. During FY17-18 there has been fabulous growth in Bio-Pharma, Performance Chemicals and Life Science business. The same has not been properly highlighted in 2017-18 annual report. Request to all the minority shareholders - Do not vote in favor of the resolution for sale of BPL business at this rate.


(arpitjain512) #16

@basumallick still Tracking Merck ? It has surged almost 150% in last 1 year


(Abhishek Basumallick) #17

@arpitjain512 not any longer. I made my returns in it :slight_smile: , though missed the meteoric rise in 2018 :frowning: , but such is life!!


(arpitjain512) #18

ok. Btw have seen you are very good at catching such Compounding stories at a very early stage. Any thread where you share your current Investments or Watchlist ?


(Abhishek Basumallick) #19

Thank you.

No specific thread as such. If I find something interesting, I usually write about it in its existing thread or create a new thread or blog about it.

Compounding stocks are my bread-and-butter, so always try to focus on finding them. Makes life easier to buy and hold :slight_smile: