Merck’s dividend payout hikes return on capital employed

Merck’s dividend payout hikes return on capital employed

Pharmaceutical company Merck KGaA’s sales in Asia rose by 37% in 2010. India was one of the top performing markets, with sales increasing by 38% to €156 million ( 985 crore today). But this growth is not visible in its listed Indian subsidiary, Merck Ltd, in which it holds a 52% stake. Merck’s sales rose by about 8% to 509 crore.

The parent also has two other privately owned subsidiaries in India, Merck Specialities Pvt. Ltd and Millipore (India) Pvt. Ltd. Millipore was acquired by Merck KGaA globally, adding to income growth in 2010.

Merck’s annual report shows where it stumbled. Its pharmaceuticals division contributes about 70% to sales, and chemicals the rest. The chemicals division’s sales rose by 21%, driven by sales of basic inputs to pharmaceutical companies, but the pigments business was affected by an anti-dumping duty.

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Higher capacity to produce one product—thiamine disulphide—is expected to drive export turnover in 2011. The chemicals division’s growth would have been higher, but for poor performance of one product—Oxynex—and it took a hit of about 14 crore to write down the assets created for this product.

The Merck Serono division, which sells prescription products, contributes to over 90% of the pharmaceuticals division’s sales, while consumer healthcare products bring up the rest. Merck Serono’s sales were virtually flat in 2010, and pulled down the division and the company’s sales growth.

Merck’s manufactured products sold well, with sales rising by about 19%, but traded products’ sales declined. Note that the pharmaceuticals division’s performance in the second half of the year was much better, with sales rising by about 20% over the previous corresponding period.

Cash from operations rose by 42% due to better profitability and efficient working capital management. Instead of hoarding cash on its balance sheet, Merck paid out 158 crore as dividend, bringing its cash balance down to 143 crore as of 31 December, compared with 325 crore in the previous year. As a result, its return on capital employed jumped to 18.2% from 14%.

The company’s share price, at 627, is down by about 38% from its 52-week high seen in October and is up 13% from the low levels seen in March 2011.

Graphic by Yogesh Kumar/Mint