Operating profits for the nine-months increased by 24 per cent to Rs 69.9 crores, while depreciation and other income stood at Rs 12.2 crores and Rs 7.9 crores respectively.

A company press release said that Wockhardt had maintained sales for the third quarter ended March 31, 1999 at Rs 97.4 crores compared with Rs 96.1 crores inspite of sluggish market conditions. Operating profits for the period went down marginally to Rs 15.9 crores from Rs 16.9 crores in the same period last year.

The higher depreciation and additional interest burden has pulled down net profits from Rs 15.4 crores to Rs 7.8 crores in the third quarter of the current year. Interest costs have been incurred largely for the Merindacquisition and for setting up of the new medical nutrition manufacturing facilities at Chandigarh, according to the company press release.

"The running expenditure for the Chandigarh plant has been absorbed in the period though the plant will be fully on stream by the end of the current calendar year," it adds.

Wockhardt chairman, HF Khorakiwala said: "The performance of the company was satisfactory in view of the depressed market conditions. The Wockhardt group has maintained its ORG ranking and marke share for the period under the review. Key brands Spasmo Proxyvon, Proxyvon and Sparx grew by 57 per cent, 26 per cent and 38 per cent respectively in the period under review. Zedex has become the third largest prescribed cough syrup for the quarter while Spasmo Proxyvon has entered the list of top 100 brands in the country".

The company also maintained a conservative view on exports to Russian markets and did not conclude any sales on this account as it did last year.

Shareholders to benefit fromdemerger
Sarad Saraf

There has been much debate regarding the budget proposals on the tax treatment of demergers. The intent behind the changes -- that corporate India should be able to restructure with minimum trouble -- has, however, never been suspect.

It is this, perhaps, that has prompted companies like Great Eastern Shipping and Wockhardt to announce their demerger plans despite the lack of clarity in the tax provisions. While Great Eastern Shipping has decided to demerge its property business, Wockhardt plans to demerge all but the pharma business. Both companies have decided to concentrate on their core businesses -- shipping and pharmaceuticals, respectively.

While Wockhardt's management has merely stated their intent to demerge the company into two and details have not been made available, that the move to create a pure pharma company will be in the shareholders' best interests cannot be negated. The current shareholders will get shares in the resulting company in proportion totheir current holding in Wockhardt. While Wockhardt would have become a pure pharma company, the new entity will be in diversified businesses like agri-sciences, medical nutrition, healthcare and intravenous (IV) fluids.

Agri-sciences, medical nutrition and healthcare together account for around 20 per cent of Wockhardt's revenues. Accordingly, consequent to the demerger, its revenues would fall by that extent. The intravenous fluids business is, however, conducted by a subsidiary -- Wockhardt Healthcare.

Post-demerger, the subsidiary would perhaps be transferred to the new entity. Though there could be other arrangements as well this seems most likely considering that the subsidiary is not wholly owned and has a number of shareholders. Current estimates indicate that the new entity would be a Rs 100 crore company while Wockhardt would continue to have a turnover of over Rs 400 crore.While the new entity would probably be an agri-sciences & medical nutrition company with Wockhardt Healthcare as asubsidiary, Wockhardt would be a pure pharma company with three wholly-owned subsidiaries -- Merind, Wallis and Wockhardt Europe. As far as Wockhardt is concerned, it should get a higher discounting on the bourses post the demerger. While pure pharma companies like Glaxo enjoy a discounting in excess of 50, Wockhardt's price-earnings multiple is merely about 17. However, interest payments relating to the funds borrowed for Merind's acquisition would continue to impact Wockhardt's cash profits. Further, as Merind would be a subsidiary, its earnings would not be reflected in Wockhardt's books directly. This could dampen sentiments for the stock a little but the shareholders would still be better off. They would benefit from improved valuations for Wockhardt as a pure pharma company and have the option to get out of its other businesses. Even if a shareholder chooses to retain his shareholding in both companies, he could expect to benefit. This is because the other businesses would logically do better in aseparate company as the new management would be able to concentrate better on those businesses. In the existing scenario, the management attention would be more on the core pharma business than the other businesses.