Indian Pharma: Rx Consolidation

Indian Pharma sector has been long under performing compared to various other sectors. This under performance is attributed to several reasons such as eroding margins in the US generic business, weakening dollar etc. The chart shows the beating Pharma stocks have taken on the NSE.

Indian pharma companies are very good at producing quality generic drugs with continuous improvement and are also amongst the lowest cost manufacturers in the world. These companies are very similar in their operations, business model and to a large extent in the skill sets too. This seems to me the predominant reason for current under performance as these companies are competing fiercely not only in domestic market but also in the export market. This high competition is largely responsible for reducing margins and conceding all the 'low cost' Indian advantage to the world. The competition in the world generic market is further heating up and smaller Indian companies cannot sustain for long unless they get strong backup from Indian market.
With many players around the world going after generics, the margins are ought to fall. Companies are doing cross border M&A to access newer markets and capabilities. But this phenomena is causing problems because all companies in a way are becoming similar. Even the name is 'generics' but there is a critical need among companies to differentiate and to build scale. Acquiring companies abroad will help Indian companies in accessing new markets and counter the weak dollar effect, but to deal with margin pressures lot of domestic 'big deals' would be required. Currently there are some 15+ companies supplying bulk drugs largely to US market and it makes a very good case for these companies to come together and benefit from economies of scale to efficiently manufacture while also efficiently maintain large R&D pipelines.

but why is it already not happening?

Almost all Indian pharma companies are family owned. Is this ownership structure impeding domestic M&A?

A similar situation can be soon expected in IT sector also when margins will start shrinking when Indian service providers start competing vigorously against one another. But will we see M&A sooner there for them being largely professional companies?

Arun Gandhi on Tata Corus Deal

Arun Gandhi - the Tata Corus deal maker in an interview to Moneycontrol talked about the deal. Some of the highlights:

Deal Timing:
The timing of the deal was crucial as during that time the Russian companies were undergoing IPO and if the deal had been delayed then they would have also jumped in with their IPO collections thereby increasing the competitive pressures of the bid.

UK Takeover code:
The UK take over code governs the deal making process to ensure fair deal to the shareholders. The law requires regulations on the break fee and stake building which acts as defense against the competition. The break fee has to be less than 1% of the transaction value and also the company directors need to certify that the break fee is in interest of shareholders. The stake building is allowed upto 30% prior to announcement. Post announcement stake building is risky as the access to confidential information during due diligence may expose the bidder to criminal insider trading prosecution and also it does not get a right to vote in the bidding. The UK law also has a provision to prevent financial assistance - target company (only public companies) to let the bidder use its assets or guaranties to secure financing.

608 pence:
In the last round of bidding CSN topped up at 603 pence and Tata wrapped up the deal at 608 pence. The price was chosen at 5 pence higher as there was 6 weeks time to go after the auction date and the Corus share price would have included the time value of money thereby keeping the share price lower than 603 pence. CSN at this point might had created trouble as it could have bought as many shares as it could at a price less than or equal to its bid of 603. Tata hence had to keep the share price above 603 and hence a bid of 608.

India Inc and Global domination!

Are the days of cheap money for buyouts over?

The rising bond yields suggest so. Media reports or Blackstone's stock performance also suggests so. Does it means the end of Mergers and Acquisitions around the world and especially the much talked about India Inc' overseas acquisitions?

I do not think so.

Indian companies were not acquiring overseas companies because interest rates were low earlier. Predominantly all Indian acquisitions were strategic and growth oriented. They were either to acquire technology or to acquire market access and customers. Those fundamentals of India Inc are still very much intact and hence the intent to acquire is intact. The question of funding though important but is not ultimate decider. Indian companies have been borrowing large sums overseas to fund the acquisitions only because funds are cheaper there. The increased interest rates will increase cost of borrowing but will equally reduce the valuations. In that scenario the increased interest expenses should be more than compensated with reduced cost of asset overseas. The US stock markets are down by about 6% while interest rate is up by about 4%. Hence the overall impact is only towards the better liking of India Inc. Instead of slowing down global acquisitions it is rather a buying opportunity!