Date:30/07/2006 URL: http://www.thehindubusinessline.com/bline/iw/2006/07/30/stories/2006073002290800.htm

Back Matrix Labs: Hold

Nath Balakrishnan

With a slew of acquisitions, Matrix's business profile sports a far more diversified look now compared to its dependence on a single product three years ago

Mr N. Prasad, the Chairman of Matrix Laboratories. - Mohammed Yousuf

Existing investors may retain their holdings in the Matrix Labs stock, which trades at around Rs 260. Though the company's prospects in the near to medium term are good, the stock is trading at a rich valuation of about 30 times its annualised per-share earnings for the current fiscal. The street appears to be pricing in, at least in part, some of the benefits that are expected for the company over the medium term.

Over the last three-four years, Matrix has seen a significant transformation. From being a player dependent on one product — Citalopram — to one with a presence in several stages of the pharma value chain — active pharmaceutical ingredients, formulation (medicines in finished form) and the contract research business. The diversification has played a key role in reducing risks attached to the business and enabled it to address a substantively larger market.

Acquisition streak

Matrix is in the process of digesting the acquisitions it made in recent times, the largest of them being Docpharma of Belgium, which has opened up an attractive opportunity for formulations in that part of Europe. Matrix has shown the ability to consistently go after acquisitions that enable it to plug gaps in its product portfolio. Note, for example, its picking up of a stake in Concord Biotech that gives it access to both statins and immunosupressants — two attractive growth areas in which Matrix had no presence. Likewise, it also picked a 50 per cent-stake in the South Africa-based FCC, which has strengths in oncology and controlled substances, areas that do not overlap with Matrix's business.

Business prospects

Docpharma holds the key in our view, as it will serve as a vehicle to enter the formulations business in the EU market. Matrix has also outlined its intent to scale up its presence in the formulations business in the US; it plans to file 30 Abbreviated New Drug Applications in the ongoing fiscal. As Matrix scales up its formulations business, it will de-emphasise its bulk drugs segment, and that should augur well from a margin standpoint. However, Matrix is a relatively late entrant into this space, and given the competition, it will take time to establish itself in this business. We expect integration benefits with Docpharma to kick in over the next couple of years.

Docpharma also has a hospital equipment division, which accounted for about 45 per cent of revenues at the end of the last fiscal. This is a business that does not share much in common with Matrix, and its divestiture is on the cards. The proceeds from the sale would then be used to repay debt. This would be the key event to watch out for in the medium term.

The other business that could see improved traction is the anti-retrovirals (used to treat AIDS) business. Supplies to its joint venture partner (Aspen of South Africa) commenced in the last quarter of the previous fiscal and this business is expected to register good growth. However, noting the nature of this business, margins are likely to be in the mid-teen level.

Consolidation moves

The rich valuation that the Matrix stock trades at could also be partly attributed to the expectation that the company would be a participant in a consolidation exercise. Some months ago, the stock moved up sharply on the back of a news report that the US-based Mylan was eyeing a stake in Matrix. This was, however, denied by the management. With several MNC pharma majors keen to set up shop in India, a few Indian outfits could well be on their list. Should Matrix decide to be part of such an exercise, it could offer a fillip to the stock. However, buying into the stock in anticipation of such an event would not be appropriate.