The Hindu Business Line : Dabur Pharma: Sell in market

Shareholders of Dabur Pharma may use the ongoing open offer to exit the stock. Singapore-based Fresenius Kabi is making an open offer to the shareholders of Dabur Pharma.

Through a cash offer at Rs 76.50 per share, the acquirer hopes to mop up 3.13 crore shares out of the 4.18 crore shares available with the non-promoter shareholders. Fresenius Kabi, in April, agreed to acquire a 73.3 per cent stake in Dabur Pharma at Rs 76.50, from the promoters, International Finance Corporation and select employees.

Offer decision

Several factors argue for an exit from the stock at this juncture. The open offer price is attractive, valuing Dabur Pharma at 35 times the trailing earnings per share (excluding one-time items). In the secondary market, the stock trades at around Rs 75, after hovering in the Rs 64-75 band for the last six months.

The price is reasonable when seen in the context of the company’ present fundamentals. Post-offer, a lower floating stock may reduce liquidity in the counter. However, having decided to exit the stock, investors have the choice of tendering to the open offer or selling their entire holding in the secondary market. As of now, the latter appears the better option.

Investors tendering to the open offer will not be able to completely exit their holdings, though they may enjoy a high acceptance ratio (75 shares out of every 100 held). Once the offer is complete, there is the possibility of a delisting offer (at least at the same price) to mop up the remaining shares, if the public shareholding falls below the prescribed 10 per cent threshold. However, the success or failure of the open offer will hinge on the role of institutional shareholders. As per the latest shareholding pattern, institutions hold about 14.8 per cent of Dabur Pharma and the public just 11.9 per cent. Institutions such as Doric Asia Pacific Small Cap Fund (a P Note holder), have already entered into an agreement to tender holdings in the open offer.

Selling the stock in the secondary market may allow investors to cash out at the current market price of Rs.75 per share.

Though an investor would be able to sell his entire holding at this price, he would lose out on any future upside in the stock. However, selling through the open market is also the better option from a tax perspective. Investors tendering through an open offer will have to pay capital gains tax at their marginal rate of tax.

Business overview

Oncology-focussed Dabur Pharma may be expected to post healthy sales growth in 2008/09 as it expands sales in the US and Europe. In India, Dabur Pharma has 20 per cent market share in oncology. The oncology business grew by a tepid 11 per cent in 2007-08 and formulations at 30 per cent. Going forward, the massive front-end structure of Fresenius in developed markets may allow scaling up of revenues and earnings. It is also likely that Fresenius will make India its oncology manufacturing hub.

Fresenius Kabi, which provides patients in many countries in Europe with an outpatient nutrition therapy service, is likely to use Dabur Pharma to expand its offering of patient-specific oncology therapies.

Growth for Dabur Pharma may be capped to some extent, if it chiefly supplies to Fresenius’ compounding centres. Dabur Pharma’s core profit margins, which stood at 10 per cent for trailing 12 months, may also receive a fillip as its new plant in Himachal Pradesh gets commercialised, leading to tax gains.

The company operates two production facilities in India and one in the UK. It also has a research and development centre near New Delhi and a 24-product pipeline with four in the late pre-clinical and clinical stages.

Morgan Stanley India Company is the manager to the offer, which closes on July 9.

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