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Smart rally in Bayer India

Suresh Krishnamurthy

IN the past 15 trading sessions, Indian drug companies have out performed the stocks of the affiliates of multinational drug companies. Stocks of Dr Reddy's Laboratories, Cipla and Ranbaxy Laboratories have been surging ahead while stocks of companies su ch as Glaxo, Novartis, Burroughs Wellcome, E Merck and Hoechst Marion Roussel have been languishing.

Earnings growth expectations has been behind the divergent performance of Indian drug companies vis-a-vis that of the affiliates of the multinational companies. The demand slowdown in the Indian market has been affecting the performance of all drug compa nies.

However, the Indian drug companies have been able to boost their export performance. This was expected to help them come up with improved earnings growth.

In line with such expectations, Ranbaxy reported a 22 per cent growth in net profit for the quarter ended June 2001. Companies such as Cipla and Dr Reddy's are also likely to follow this trend. In contrast, companies such as Glaxo are expected to report sharp declines in earnings compared to the corresponding quarter of the previous year.

The stock of Glaxo, considered as one of the premier multinational stocks, touched its 52-week low in the previous week at a price of Rs 301. While the stock has not sank below that level since then the stock is still close to that level at around Rs 303 . Similarly, the stock of Novartis is another scrip that has slumped considerably and is now trading close to its 52-week low.

Apart from drug companies, there are stocks of multinational companies in other industries that also have been largely in the negative territory. Stocks such as Reckitt Benckiser have suffered a similar fate. The recent unraveling of its joint venture wi th Nicholas Piramal appears to have affected the investor sentiment in the counter. However, at the earnings level, Reckitt has generally been able to report a steady growth in earnings until now.

Other multinational company stocks that have lost value include Atlas Copco, Ingersoll Rand, Henkel SPIC, Bata India and Fag Precision Bearings. These stocks have had to withstand the worst of the slowdown in the Indian economy and their earnings growth in the near-term is not likely to be impressive. This has pulled down the stock prices.

Stocks of multinational companies that have been able to buck the trend are Bayer India and Nestle India. Both these stocks are high-dividend paying stocks. However, this does not seem to be behind the run up in stock price.

In fact, the run up in the stock of Bayer India continues to be extended by the day. This has now provided room for the belief that a restructuring of the company's activities may be in the offing. The stock of Nestle India has been rising primarily due to expectations of a buyback. This has allowed the company to buck the weak trend that has now afflicted stocks of consumer goods.