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Friday, July 11, 2008

Merck India Limited - A Good dividend stock pick

Investment Rationale

MIL, 51% subsidiary of Merck KGaA – Germany, operates in

Pharmaceutical and Chemical segments.

Giving more thrust to top-line growth to achieve significant

scale thru deeper penetration with increased field force, selective

new launches from the parent and some line extensions in

pharmaceutical segment.

Focus on fast growing therapeutic segments such as

cardiologicals and hematinics should enhance their contribution

to 10-12% of sales (~ 8% in CY 2007) going forward. These

segments enjoy good margin as well.

MIL is setting up bulk chemical (Oxynex) plant at Goa @ capex

Rs. 27-30 crore in CY 2008, which will enhance Oxynex ST

capacity to 150 TPA (22 TPA). This 100% EOU expected to

commence production in Sep–Oct 2008, would generate

revenues of ~ Rs 22-25 crore at full capacity by CY 2009 with

gross margin of 20%.

It is debt free company with surplus cash of ~ Rs 350 crore (i.e.

Rs 206/- per share) as on Dec. 31, 2007, offering greater

opportunities to acquire good businesses / brands.

Thus, MIL is expected to grow topline @ 15% (+). Once, topline

will grow, profitability is also expected to improve going ahead.


Investment Concerns

58 % of turnover (i.e. vitamins) is under DPCO.

Existence of parent's 100% subsidiary, Merck Specialities in

India, could to some extent, pare interest of the listed entity.


Recommendation

Investor friendly company with track record of high dividend

payout. At CMP, dividend yield works out to be ~ 5.7%.

At CMP, the share (Rs. 10/- paid up) is trading at 8.6 times CY

2007 actual EPS of Rs. 40.8 and 8 times CY 2008 expected EPS

of Rs. 44.09. Considering aggressive growth plans, we

recommend to "BUY" the share at CMP.

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