"We expect valuations to improve post-2005"

The Rs 233-crore Elder Pharmaceuticals is one of the fastest-growing pharmaceutical companies in India.

 The company expects its top brands to grow 40-45 cent in this fiscal. It posted a total income of Rs 60.94 crore (Rs 609.4 million) for the first quarter of the current fiscal, per cent.

The company almost doubled its gross profit to Rs 5.14 crore (against Rs 2.66 crore), while the net profit improved to Rs 3.04 crore (Rs 1.30 crore).

The scrip is currently trading at Rs 70 levels, a P/E of 10x. Alok Saxena, director (international division), talks to Sunil Nair about the company's future plans.

Your total income rose 21 per cent in Q1FY04. What do you attribute the improved financial performance to?

We focused on our top brands, which helped us put up a good performance. We have four or five strong brands like Shelcal, which is the number one brand in calcium, Chymoral, Eldervit, etc.

Focus on our distribution and logistics network also helped us. We expect to improve the performance in the next couple of years.

We are strongly positioned in the domestic market as far as our top brands are concerned. We are trying to get the bulk drug plant at Patalganga commissioned by September-October. We also plan to concentrate on exports.

The profitability margin seems to be very low at around 5 per cent. What is the reason for this?

That is one of the things we are working on currently. We introduced a new payment system for our sales division, which should help.

Delayed realisation from our debtors has been a problem. We are focusing on the same to ensure that money comes in promptly.

We are one of the few companies to use international brand licensing. We have collaborations with 27 multinational companies. We are licensed to brand their technologies.

We will buy raw materials from the MNCs where margins on products are low. Come 2005, very few companies in India will be able to bring in new molecules.

We will be one of the few companies to use marketing rights to introduce international brands in the domestic market. The current low margins are in a way an investment for the future. We are also looking at optimising our product-mix to improve margins.

Can you tell us about Elder's research and development infrastructure?

Elder has its own R&D base in India, which is recognised by the government. But as of now, a major part of our R&D is sourced from MNCs.

Your Patalganga plant is about to be commissioned. What is the kind of growth you are envisaging for FY04?

We are revamping our marketing strategy. We are getting into hypertension, pain management, diabetics and central nervous system products. We expect our top brands to grow 40-45 per cent and other brands to grow 15-20 per cent.

Can you elaborate on your tie-up with Blistex?

Currently our tie-up with Blistex is for marketing their products in India. Blistex is the world's third largest lip-care products company.

In future the marketing rights may extend to Nepal, Sri Lanka or Bangladesh. We are also planning to manufacture their products with their technology in India before selling it here.

The current market size for these products is around Rs 130 crore (Rs 1.3 billion) and we expect it to grow further. Most of the products in this segment are FMCG ones.

Elder already has a strong presence in this market with products like AM-PM mouthwash, AM-PM toothbrushes, AM-PM toothpaste, Tiger Balm, Tiger Oil, Tiger Muscle Rub, etc.

Recently you entered the confectionery market. Why is a pharma company like Elder getting into confectionery?

This is a natural extension of our presence in the consumer products segment. We already have many lifestyle/healthcare products, and the infrastructure and distribution network is in place.

Most of our business in this area comes from companies like Sahara, etc. However, we are basically a pharma player -- large in formulations and getting into bulk drugs, mostly exports.

Can you talk about your export thrust and the kind of markets you are looking at?
As of now we are looking at Africa, South-East Asia, China and Latin America. We are the first Indian company to have a drug registered in Mexico.

For intermediates, we are looking at US and Europe. Once we get US Food and Drug Administration approval, we will look at the US bulk drugs market as well.

We expect the export turnover to grow to Rs 40 crore (Rs 400 million) by the end of this fiscal. We are also planning to export generics to the US.

What is your outlook for the pharma industry, especially post-2005, when the patents regime will be in place?

I don't think anything dramatic will happen post-2005 when there will be a change in patents from process to products. Yes, there will be a problem with launching new molecules.

But for players like us, who have licences in hand, there won't be much of a problem. MNCs stand to gain and I expect a re-rating of MNC pharma companies. Post-2005, we will look at not just outsourcing but contract manufacturing as well.

Can you tell us about the changes at the management level?
There is a qualitative change in the management now. There is a renewed focus on human resources.

We are also trying to update the skills of our staff in India. We expect rewards within six months to one year.

Is there any cost-cutting plan?

It's an ongoing process. We keep on looking at each aspect of expenses and see whether it is justified. It is not a cost-cutting exercise. We call it rationalisation of expenses.

How do you find the current valuations of Elder Pharma?

I think we are undervalued. I don't think the market has fully grasped our story. I expect valuations to improve post-2005, once our advantages under the new regime become clearer.

Is there any plan to dilute the promoter's stake (60 per cent) in the company?

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