Two To Tango
Lupin Chemicals' acquisition of Max-GB's cephalosporin-C and 7-ACA facility makes strategic sense to Lupin Laboratories' plans in the cephalosporin segment. The former benefits from having assured offtake for the product and can capitalise on its expertise in fermentation technology.
Lupin Labs' possesses one of the most sophisticated plants in the cephalosporin segment. This is approved by Merck Generics, which takes care of Lupin's European market.
The company is hitting the export market with injectible forms which are going off-patent; Cefotaxime, which has recently gone off-patent, is the latest addition. Ceftriaxone and Ceftazidime will be introduced as and when they go off-patent in the international market in the year 1999 and 2000 respectively.
The market will then be deluged with players, thereby exerting downward pressure on prices. To ensure early entry and sustenance of margins, backward integration is essential. Thus, the acquisition makes sense from the cost efficiency angle. It will see Lupin Labs lift the offtake on a mark-up basis from Lupin Chemicals.
In its current product portfolio, Lupin Labs has seen cephalexin and cefaclor prices drop significantly in the past one year. The company will also obtain an edge over Orchid Chemicals that has a strong hold in the international cephalosporin market. The latter is not producing 7-ACA in-house at the moment, though it has planned such a facility in Chennai.
From Lupin Chemicals' perspective, the company has been using fermentation technology for long with respect to rifampicin. Its familiarity with the technology will facilitate effective absorption of the new facility. The company will now become a direct supplier of 7-ACA to Lupin Labs for further synthesis in to bulk cephalosporins.
The fermentation technology is known to very few companies world over, apart from Gist Brocades and Biochemie. Most cephalosporin producing companies in India are importing this intermediate and its international prices have gone up by 70 per cent over the last three years.
The domestic market for intermediates will see two more players _Alembic Chemicals and Gujarat Themis Biosyn. The latter has recently acquired this technology from its group company Kopran. New capacities could see domestic prices come under pressure. However, an assured customer in the form of Lupin Labs will protect Lupin Chemicals from price fluctuations in the future.
GMDC
GMDC's desperation to project its power project as the saviour for the company is understandable. The share which was issued at Rs 130 at the time of the IPO and rose to a high of Rs 160 post-listing is now quoting at about Rs 65. The price discounts the 1997-98 earnings by a measly 2.4 times.
The company enjoys a virtual monopoly in the state of Gujarat for the supply of lignite but even this has not spared it from the effects of an industrial slowdown. It derives more than 90 per cent of its turnover from lignite mining.
Concerns could stem from the fact that profit growth has slowed down from about 80 per cent in 1996-97 to 22 per cent in 1997-98. The first quarter of 1998-99 shows the trend continuing, with sales falling by 2.4 per cent over the previous corresponding quarter to Rs 62.82 crore while its net profit has increased marginally to Rs 28.78 crore from Rs 27.63 crore.
The lack of sustained profit growth seems to have undermined investor confidence. In fact, the company's other income in the first quarter ended June 1998 jumped to Rs 7.55 crore from Rs 4.63 crore. Without taking this into account, profits would have actually declined.
Other income stands at Rs 34 crore in 1997-98, and apart from income from investments it arises out of rentals from assets leased out to state government undertakings. Poor earnings quality too seems to be taking its toll on valuations.
To this, the company is holding out the carrot of a Rs 1180-crore 250 MW lignite-based power project. The project will use lignite that has been mined in-house. The PPA is close to being signed, and the unit will start generating power in 2001 and contribute to profits without any equity dilution. The project will also enhance its asset base, lowering tax incidence, which is 39 per cent of its profit before tax at the moment.
This too has not impressed investors. For one, the power project is more than a couple of years away from commissioning. Second, the company will need funds to deploy in the power project and is likely to raise debt for the same.
It is enjoying a zero debt position as at March 1998. With profit growth likely to be dull till the power project goes on stream, valuations seem consigned to the same fate till then.