Parke Davis (India) Limited

PDIL was a subsidiary of Warner Lambert (WL), US holding 40% stake in the company. Following the international merger of WL with Pfizer Inc., PDIL has become subsidiary of Pfizer Inc. The company has announced excellent results for FY01 due to the spurt in other and extraordinary income. Currently, the scrip is attractively priced compared to its peers.

We review in detail the business plan and the merger with Pfizer India.

PDIL has been successful in converting its major brands from ethical to OTC status through continuous efforts. This has improved the visibility and increased the market share. The major brands in the OTC segment include: Benadryl (cough syrup), Gelusil (antacid), Listerine (mouthwash), Waterbury’s Compound (cough & cold), Ferradol (food supplement), Neko soap etc. All these brands have come in limelight due to the advertisement in the visual and print media. This has improved the market share of the company. We expect PDIL to become a dominant player in the OTC segment due to its strong brands.

PDIL’s major cough syrup Benadryl has an excellent performance in the OTC segment and achieved annual sales of about Rs. 35 Cr. Benadryl is growing at more than 30% in the domestic market and is marketed in three variants: Benadryl Cough Formula, Benadryl Syrup and Benadryl Soft gels. It is one of the fastest growing brands in the OTC segment. We expect improvement in the market share due to its extensive use in the treatment of cough, cold and allergies.

The company operates in 4 major therapeutic segments viz.: Cardiology, Gynecology, Neurology and Pediatric and has well-established brands in each segment. Its new brand Calcal, used for pregnant and lactating women has been well accepted. PDIL’s other major antibiotic brand- Chloromycetin is extensively used in the treatment of eye infections. Warcilin-antibiotic has been widely prescribed by the physicians. We expect that these ethical products will help to sustain the future growth of the company as they find a good blend with the OTC products.

PDIL has received Rs. 7.71 Cr. as the compensation in 3Q01 for the termination of long-term lease agreement from 100% subsidiary Warner Lambert India (WLIL) in respect of certain assets. Moreover, PDIL will receive Rs. 21.11 Cr. from WLIL for the sale of these assets in FY02. The company has reported higher other income of Rs. 20.22 Cr. in FY01 against Rs. 11.96 Cr. in FY00. Though this is one time income, it will transform PDIL into a cash rich company.

PDIL has completed the sale of its Saki Naka property for Rs. 49.3 Cr. in March 2000. The company has already received Rs. 47.92 Cr. (net of tax) from the purchaser A-Class Builders & Developers in FY01. PDIL is likely to repay the entire debt of Rs. 35.0 Cr. and will become a zero debt company from FY01 onwards. We feel that this will improve the valuation of the company before its merger with Pfizer takes place.

New products- well accepted by the medical profession

PDIL’s new products have gained good acceptance in the market resulting in the improvement of their ranks. Atpark (cardiovascular) has improved its rank from 32^nd to 10^th position, Calcal (calcium supplement) (from 67^th to 25^th) and Warcilin (antibiotic) (from 115^th to 10^th) rank after their launch. We expect further improvement in their ranking due to additional efforts in promoting these products.

PDIL has introduced patient benefit program across the country. The company has organized various programs like hypertension camps, Neuro clinics, Ante- natal camps that have benefited more than 15,000 patients. PDIL has distributed patient educational booklets and the starter dose of the company products to each patient. This has improved the visibility of the company. PDIL has started advertising Waterbury’s compound and Listerine by supplying leading newspapers in carry bags bearing advertisement and brochures of these products. This has led to the mass education campaign for these brands and has resulted in registering the brand names to the minds of the customers.

PDIL has reported encouraging results for FY01 with 6% increase in sales from Rs. 200.39 Cr. in FY00 to Rs. 211.67 Cr. in FY01. The total expenses were marginally up from 86.7% to 87.6% of sales, mainly due to increase in material cost. The raw & packing material cost along with stock adjustment went up from 9% to 11% of sales. The purchase of finished goods was lower from 28% to 27% of sales. The operating margin was marginally down from 13.3% to 12.4% due to increase in material cost. Other income was up by 69% from Rs. 11.96 Cr. to Rs.20.22 Cr. from the compensation of Rs. 7.71 Cr. received from WLIL. EBITA went up by 21% from Rs. 38.57 Cr. to Rs. 46.51 Cr. There was a 51% decline in interest cost from Rs. 5.89 Cr. to Rs. 2.90 Cr. due to repayment of debt. Depreciation was lower by 25% from Rs. 7.98 Cr. to Rs. 5.98 Cr. The tax provision jumped by 805% from Rs. 1.73 Cr. to Rs. 15.65 Cr. due to higher other income of Rs. 7.71 Cr. as compensation for the termination of long-term lease agreement from 100% subsidiary WLIL in respect of certain assets. There was an extraordinary income of Rs. 47.92 Cr. (net of tax) from the sale of Saki Naka property. Extraordinary expenses (VRS) were up by 17% from Rs. 6.36 Cr. to Rs. 7.45 Cr. The net profit jumped up by 276% from Rs .16.61 Cr .to Rs. 62.45 Cr.

We expect 8% growth in sales in FY02 compared to 5% achieved in FY01.The increase in sales will come from the fast moving OTC brand Benadryl, new products and other established brands.

The operating margin is expected to increase from 13.3% in FY01 to 15.5% in FY02.The improvement in margins will come from reduction in purchase of finished goods cost from 29% to 28%.

PDIL has achieved 8% CAGR in sales and 42% CAGR in net profit in last 2 years.

We expect an EPS of Rs. 25.1 for FY02 as compared to Rs. 16.1 in FY01.The current market price of Rs. 182 discounts the FY02 earnings by 7.3X giving ample opportunity for capital appreciation.

The scrip is currently available at the market cap / sales ratio of 1.0. We feel that this is an attractive price in view of the strong brands and leading position in the OTC segment.

The merger of Pfizer and PDIL will result in a strong company with annual sales in excess of Rs. 900 Cr. and market share of more than 3.5%. The merged company is expected to occupy 5^th position in the domestic formulation market. The combined field force of 1150 (700 of Pfizer and 450 of PDIL) will be one of the largest in the industry. The integration of the sales teams of the two companies has started prior to a full-fledged legal merger. We expect the exchange ratio from PDIL to Pfizer will be favourable for the shareholders of PDIL due to its strong brands in OTC segment, excellent marketing set-up and sound financial position, from the current price level.

As per the ORG report of January 2001 PDIL is ranked 22^nd with moving annual sales (MAT) of Rs. 190.22 Cr. and growing at 6.8% against the market growth rate of 10.1%.

Source: Industry

These three brands contribute about 42% to the company’s revenues. Gelusil MPS and Benadryl have OTC status whereas Abdec is multivitamin brand, which has nearly OTC status. We expect these brands to improve the market share of the company due to their advertisement in visual and print media coupled with the thrust on marketing.

We expect Parke Davis to be an OUTPERFORMER in view of its leading position in OTC segment, strong ethical brands and sound financial position due to restructuring.