Bonus Bonanza

The December 1997 results have started pouring in but only Hind Lever Chemicals and SmithKline Beecham Pharmaceuticals have declared a bonus. The Smart Investor checks out

Since the markets have changed with a strong bias towards quality, multinational stocks have attracted a lot of attention. Most of them also have their financial year ending in December and hence it is not surprising that it is these results that have brought some cheer to the market in the past two weeks. Among these companies, only two Hind Lever Chemicals and SmithKline Beecham Pharmaceuticals, have declared a bonus. Both of them will issue a 1:1 bonus.

Hind Lever Chemicals

Hind Lever Chemicals, (formerly Stepan Chemicals), has posted an impressive net profit growth of 42 per cent for December 1997. The board of the company has also proposed a bonus issue in the ratio of one share for each equity share held in the company, and the dividend pay-out is 180 per cent.

The company posted a turnover growth of 19.14 per cent to Rs 566 crore in 1997 over the previous year. The net profit increased by 42.56 per cent at Rs 24.75 crore. This improvement in profit was achieved by a reduced interest burden. Interest fell from Rs 6.76 crore in 1996 to Rs 3.55 crore in 1997. Depreciation increased due to new capacities coming in place but the increase was only from Rs 2.7 crore in 1996 to Rs 4.59 crore in 1997. The reduction in corporate taxes has not affected Hind Lever Chemicals as the tax burden stands at Rs 16.75 crore against Rs 17 crore last year.

The companys Paras brand of phosphatic fertilisers maintained its leading position in the markets of West Bengal and Bihar and the sale of single super phosphates also increased. In terms of production, the company made a record of sorts by producing 265,000 tonnes of di-ammonium phosphate (DAP) and 42,000 tonnes of sodium tri-polyphosphate (STPP). The result is that it has become the largest STPP producer in India.

Moreover, the company is amidst an expansion plan and will set up a new capacity for 120,000 tonnes per annum of single super phosphate (SSP) and a sulphuric acid plant. This will enable it to meet the growing demand of the Paras brand of fertiliser from farmers of states Bihar, West Bengal, Uttar Pradesh. Last year, the company has also invested Rs 20 crore in environment protection. Its factories do not generate any liquid effluent and converts solid waste into value added products.

A large part of Indias soil is deficient in phosphates requiring supplement through fertilisers. Phosphates are important for root growth and better grain output in terms of quantity and size. According to the company, the growth in phosphatic fertiliser demand has been contrary to the recession in the industry with a significant growth in the period January-December 1997 over the previous year.

The government is also cautioning farmers, along with agricultural experts, against the predominant use of urea-based fertilisers as their imbalance does not bring in the desired growth in yield. Therefore Hind Lever Chemicals (HLCL) estimates requirement of phosphatic fertilisers to shoot up in 1998.

HLCL was renamed from Stepan Chemicals in 1996, after Hindustan Lever transferred its chemical businesses to it in exchange for HLCLs detergent business. In 1995, DAP and STPP contributed 56 per cent and 25 per cent to the HLCL turnover. DAP is the purest form of phosphatic fertiliser and STPP is an integral component of detergents. HLCLs other products are sulphuric acid, phosphatic acid and other chemicals but they account for a very small portion of the turnover.

Last year, the company has also expanded into variant fertiliser complexes like nitrogen, phosphorous and potassium (NPKs). Presently, the company has a swing plant which means it can produce various products at the same facilities depending on market demand.

This move towards manufacturing NPKs comes at the right time. DV Ramakrishnan, analyst, Birla Marlin Securities, says, Sustaining growth in fertilisers through DAP alone in 1998 will be difficult but with the companys diversification into variant fertiliser complexes, it would do well. DAP contributes 66 per cent to HLCLs operating profits. Though the fertiliser complexes fetch lower margins, volumes will not be a constraint as it has large capacities for production.

The companys location in West Bengal, an agricultural state, is an added advantage. The end-users of its Paras brand of DAP are close-by, and so are farmers from Assam. This give the company an inherent advantage against competition. Competitors like RCF and Coroman-del Fertilisers expend considerable amounts of revenue on transportation. As HLCL requires minimal transportation cost to reach the end-users HLCL can easily sell at a lower price.

Another advantage of HLCL is that the bulk of its produce of STPP is consumed by its holding company HLL to manufacture its premium range of detergents. Ramakrishnan says that the company is fairly insulated from the vagaries of the price sensitive market to a large extent by HLL, its bulk consumer of STPP. HLCL hardly faces any competition in STPP in India as there is just one other manufacturer, Albright Wilson. Ramakrishnan adds that only if HLL reduces the production of detergents in 1998, then the sales of HLCL could be affected. But according to Ramakrishnan, the premium brands of detergents using STPP will grow at least by 5-10 per cent in 1998. Analysts expect the company to grow at 35 per cent and at the current price of Rs 670, the company is discounted 15.6 times. A lot of it is the bonus euphoria. Existing investors can hold the stock and new investors can buy at declines for the long term.

SmithKline Beecham Pharmaceuticals

SmithKline Beecham Pharma-ceuticals (India) (SBPI) posted a whopping 71.7-per cent net profit growth and a 28.5 per cent growth in sales for the year ended December 31, 1997. Its board has announced a bonus share for every share held in the company, and a 50 per cent dividend.

Net sales grew from Rs 202 crore in 1996 to Rs 259.5 crore in 1997. The profit before tax grew rose by 55 per cent to Rs 51.2 crore and profit after tax grew from Rs 19.3 crore in 1996 to Rs 33.2 crore in 1997. Another achievement for SBPI is that it is a zero-debt company for two consecutive years.

SmithKline Pharmas growth has been largely driven by all round development in the major products. The company has registered higher growths in products such as Augmentin, Bactroban, Zevit, Fefol-Z and its Hepatitis B vaccine (Energix).

SmithKlines vaccine segment has grown substantially in 1997 and has resulted in improved operating profit margins. Profits have also increased due to stringent cost controls. The company says that its inventory and receivables have grown by 15 per cent against sales growth of 76 per cent between 1994 and 1997.

SmithKlines Mysore-based Tropical Medicine Development has successfully developed malarial and other compounds for tropical diseases. This facility manufactures tablets and bulk drugs required for captive consumption. The major drug manufactured in-house Albendazole, the active ingredient in Zentil, is prescribed for mixed intestinal worm infection.

Though vitamins are not an important segment for the parent company, in India it contributes more than 25 per cent to its sales through Fifol, Fesovit and Zevit. The parent SmithKline Beecham has decided to develop some complicated product lines in tropical medicine in India.

The stock market believes that this has been a sterling performance by SmithKline Beecham Pharma as it has outstripped the industrys growth rate. The pharmaceutical industry grew at the rate of 8-10 per cent, while SmithKline Beecham Pharma registered a 28-per cent growth in sales.

For increased benefits, the company has decided to implement enterprise-wide resource planning investing Rs 10 crore to ensure that all its operations production, finance and warehouses will have on-line integrated processes and systems.

The recent announcement of the Glaxo Welcome plc and SmithKline Beecham plc merger is bound to benefit the Indian arm. In the Indian context, it would mean a merger of SmithKline Beecham Pharma-ceuticals, SmithKline Beecham Consumer Healthcare, Burr-oughs Wellcome India and Glaxo India.

But analysts believe that such a merger in India is unlikely as Glaxo had got out of food business globally earlier and SmithKline Consumer, which is basically a foods company with products like Horlicks and Boost, is likely to be sold off. Such a merger would have taken the group turnover to Rs 1600 crore and the merged entity would replace Ranbaxy from the number one position.

The product profile of the merged entity would be large and highly synergistic as Glaxos thrust areas are dermatology, vitamins, antiulcerants and cephalosporins. SmithKline Beecham Pharmas main focus areas are vaccines and anti-rheumatic medicines.

Jignesh Bhate, analyst, WI Carr, a stockbroker, says, The consolidation of the pharma giants worldwide would mean that the Indian arm would capture a 9-per cent of the total market in India. The merged entity would benefit in terms of having a large synergistic product profile and a strong presence in the area of vaccines and the vitamin segment. Market sources expect plenty of good news from the company and recommend as a long term buy.