Merck India Limited (MIL) - Buy Recommendation research report

Report Date May 23, 2008

Company Name Merck India Limited (MIL)

Price / Recommendation Rs. 352.50 BUY


Sector Pharmaceutical

One Year Target Price Rs. 525/-

Market Capitalisation Rs. 594 crore

52–week range Rs. 310-460

Shares in issue (mio.) 16.86

BSE Ticker 500126


BSE Sensex 16907.11


Shareholding Pattern on Mar. 2008


Promoters 51.00%

FIIs 1.20%

MFs / UTI 5.59%

Banks / FIs 13.45%

Others 28.76%



Investment Rationale

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

Pharmaceutical and Chemical segments.

Ø 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.

Ø 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.

Ø 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%.

Ø 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.

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

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

Investment Concerns

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

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

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


Ø Investor friendly company with track record of high dividend

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

Ø 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.



About Merck India


Ø Merck India, 51% subsidiary of Merck KGaA – Germany, operates in Pharmaceutical (accounts for 79% of sales)

and Chemical segments (21% of turnover).

Ø Pharmaceuticals business comprises of two divisions viz. Ethicals and Consumer Health Care (CHC). Ethicals

division deals with therapeutic segments such as Vitamins (Polybion, Poluzee, Neurobion, Avion),

Cardiologicals, Cough & Cold preparations (Nasivision), Dermatological (Evion cream), Haematinics

(Anemidox) and Anti- Malarials (Emquin). While CHC division deals with Nasal Drops, Oral Rehydration Salts

(Electrobion), Health Supplement, Joint Care etc.

Ø Chemicals business comprises of Bulks drugs, Pigments and Life Science Products.

Bulk Drugs

12-13% of sales

ñ Mfg. Vitamin E, Oxynex, Thiamine Disulfide (TDS) and Guaiazulene. Company is the sole manufacturer of

Guaiazulene and TDS for Merck companies globally. TDS is manufactured at 100% EOU and exported to Europe

& South East Asia. MIL is major domestic manufacturer of Vitamin E.


4% of sales

ñ Sourced from Merck Operations worldwide, Iriodin Pearl Lustre Pigments are sold to varied customers. During

CY 2007, company launched Candurin, unique coating pigment for food & pharmaceutical applications.

Life Science Products

ñ Supplies chemicals that are used in cosmetics, health, and nutrition industries.

Ø It has manufacturing facility at Goa, where it manufactures bulk drugs, soft gelatin capsules and injectables.



Investment Rationale


Ø Changing demographics, rising health consciousness, increased focus towards research and development, product

patent protection and expanding health insurance sector are some of the key drivers for growth of pharmaceutical

industry in India and company intends to capitalise on this potential thru deeper penetration with increased field

force, selective new launches from the parent and some line extensions in pharmaceutical segment. MIL is giving

more thrust to top-line growth to achieve significant scale.

ñ Trying to increase share of non-vitamin formulations in its product mix by launching products in fast growing

therapeutic categories like cardiovascular, hematinics, topical anti-inflammatory, diabetes and dermatology.

ñ Plans to launch 10-12 products in CY 2008, of which ~ 20% will be OTC products. Just recently, company

launched Electrobion SIP (Apple and Lemon flavour). These new products, mostly out of DPCO preview,

will help company not only to increase volume but also to improve profitability over a period of time.

ñ Company set up separate CHC division in pharmaceutical business to focus on certain therapeutic segments

in CY 2007. These measures should result in tangible improvements in operating results, beginning with

2008. Has aggressive plans for CHC business

ñ Pursuing aggressive marketing strategy. Towards this end, it has 700 recruited outsourced field force to own /

existing force of 400 reps. to ensure deeper penetration with doctors and chemists. Besides, company will

also be penetrating in rural and semi-urban areas. Increased field force has not only led to faster growth of

new launches but also growth of old matured products.

Ø In chemicals business, MIL has embarked on enhancing capacity of bulk chemicals, Oxynex ST to 150 tpa (22

tpa), in Goa @ capex Rs. 25-30 crore. Oxynex ST finds many applications in broad spectrum of photo-stabilizing

the actjve ingredients of sunscreens (skin lightening self tanning, anti-ageing, day care products), fragrances, antioxidants,

colour cosmetics and protection of formulations for extended storage, viscosity drop and colour fading.

MIL is the only manufacturer of Oxynex ST worldwide. With commissioning of new plant in Oct 2008, Oxynex

ST would be primarily exported to group companies. This 100% EOU is expected to generate revenues of Rs 30-

36 crore at full capacity by CY 2009 with gross margin of 20%.

Ø It is cash rich company with liquidity of ~ Rs 350 crore (Rs 206/- per share) as on Dec. 31, 2007. This available

surplus will provide greater opportunities to acquire brands / companies.