The response of the markets to Tata Steel’s takeover of Corus has transformed from one of revulsion to that of admiration. Tata Steel had lost as much as Rs7,000 crore or 23% of its market value after news emerged of its takeover of Corus, but based on its current share price, its market capitalization has risen by Rs16,000 crore from the lows reached in March this year, after the deal was finalized.
As a result, Tata Steel’s value has risen by Rs9,000 crore or about 30% since news of the buyout first emerged last October.
The change of stance has to primarily do with higher steel prices. Corus had raised prices of its flat rolled steel products in the UK earlier this year, which led to better-than-expected results for both the March and June quarters.
In the January-March quarter, Corus’ underlying earnings before interest, taxes, depreciation and amortization (Ebitda) jumped 76% to £254 million (Rs2,200 crore). Comparable numbers aren’t available for the June quarter, but preliminary calculations indicate that Ebitda was much higher in that period. The difference between Tata Steel’s consolidated and stand-alone Ebitda results is Rs3,205 crore. Since the contribution of Tata Steel’s other subsidiaries (NatSteel Asia Pte Ltd and Millennium Steel Public Co. Ltd) is negligible, much of the Rs3,200 crore Ebitda would be from Corus. In last year’s June quarter, the Ebitda of Corus stood at £193 million.
Thanks to Corus’s integration, overseas subsidiaries now account for 86.5% of consolidated revenues. But, given that the Indian operations enjoy much higher margins, the contribution of overseas subsidiaries to profit (before tax and exceptionals) is much lower at 50.8%. The fact that this sizeable part of Tata Steel’s business has done better than expected is what has driven its share price lately.
But, the current performance is driven by an increase in steel prices.
Analysts say steel prices are expected to remain firm, with inventory at low levels and imports from China reducing. It remains to be seen, however, what impact a possible slowdown in the US economy would haveon demand. Given Tata Steel’s high financial leverage, fortunes could reverse quickly, if prices were to move downwards.
There seems to be a glut of Indian pharma companies spinning off their R&D divisions into separate firms.
Nicholas Piramal India Ltd (NPIL) is the latest to jump on the bandwagon. Dr Reddy’s laboratories Ltd was the first, hiving off its R&D operations into a new company, Perlecan Pharma Pvt. Ltd, two years ago.
Sun Pharmaceuticals Industries Ltd followed this year, listing its drug development company, Sun Pharma Advanced Research Co. Ltd (Sparc). The difference was that while Sparc was listed, Perlecan was bought into by strategic investors Citigroup Ltd and ICICI Ventures.
The Nicholas Piramal management will clarify which of these options it wishes to take on Friday. The company’s R&D expenses has been increasing over the years and is currently at around 5% of sales. Around 50-60% of that, is spent on basic research on new chemical entities (NCEs). The firm has three molecules in the clinical stage and 10 in the pre-clinical stage.
Analysts say it would like to move five more molecules into clinics, which would require additional funding. It also has an in-licensing deal with Eli Lilly and Co. for new drug discovery, under which one molecule has beenlicensed so far to the firm.
Given the increasing number of molecules being researched, and the additional funding that is required for it, this is the right time for NPIL to spin off its R&D division. R&D is an expensive affair, with no guarantees of success, but there’s a large payoff when a success does occur. Nevertheless, most investors would prefer not to take the risk. Still, patient capital, in the form of venture capital or private equity, may be better qualified to take on the uncertainties associated with drug discovery.
Spinning off the R&D division is a de-risking strategy. There are also the obvious advantages in terms of lower costs—analyst estimates of cost savings vary between Rs50 crore and Rs68 crore, or about Rs2.4-3.2 per share, for fiscal 2009. If, in addition, the new entity were listed, that would result in further value accretion forshareholders.
Sparc, with four molecules in its NCE pipeline and one in clinical trials, is currently worth around Rs1,500 crore, which would mean an additional Rs72 per share. But, with more molecules under NPIL’s belt, Mumbai-based brokerage Sharekhan Ltd estimates a value of around Rs113.4 per share for the new entity. Of course, even if the new company isunlisted, there is no reason why value should not beunlocked.
Write to us firstname.lastname@example.org