Fairval

Notes on Indian equities, sectors and economy

Posts Tagged ‘Research on India’

Apollo group well on its way to creating a pharma distribution behemoth

Posted by fairval on January 21, 2018

Keimed Private Limited, the pharma distribution business aligned to Apollo Hospital group, ended FY17 with revenues of Rs 35B (~USD 540m). This makes it by far the largest distributor, in the totally fragmented pharma distribution market in India. No other distributor is even close to Rs 10B. Among the top distributor names in many cities, you will find subsidiaries of Keimed, gained through acquisitions.

The pharma distribution space in India is badly fragmented. In a domestic market size of around USD19B (Rs 1200B), Keimed’s market share is barely 3%. There are believed to be over 40,000 distributors in India, catering to 800,000 chemists (the retail market is fragmented too). If you look at these numbers, the average appears to be 20 chemists per distributor! In general, a distributor doing say USD 2m per annum is considered a reasonably successful distributor.

A fragmented distribution, fragmented retail and relative fragmented formulation side of the pharma business is an obvious recipe for chaotic state of affairs. The scenario is further complicated by that fact that, unlike in FMCG, where a company will have a dedicated distributor for a certain region, it is free-for-all in the pharma market. Any distributor can sell to any chemist (albeit within restrictions imposed by AIOCD, but that’s another story altogether). Also, a distributor will stock for multiple companies.

A chemist deals with anywhere between 30-50 distributors, maybe more. He will try to stock as little as possible, often just 2-3 days of stock. Order of say 2 strips are common (meaning, a distributor has to break open a case, and sell strip wise – complicating logistics and track and trace).

This fragmented and chaotic state of affairs has several negative side effects. Very few distributors or retails have any respectable IT. Too much time and effort is lost in inefficiencies. More pernicious are things like serious disregard for cold chain. Most distributors switch off their freezers when they go home. In several states, there is no electricity for half the day in any case. They can’t afford generators or other forms of power backup. This probably renders a large bunch of vaccines ineffective. Then, there is the temptation to sell spurious drugs. Around 30% of all drugs sold at retail pharma counters are believed to be spurious.

There is huge need for scale players in pharma distribution. Keimed started more than a decade ago, and has grown via a series of quietly made several acquisitions. For ex, it owns Meher Distributor, Mumbai’s largest distributor. Similarly, it owns Vardhman Pharma Distributor, Bangalore’s largest distributor. Its model is not to take 100%, many of its acquisitions are owned 51%, the original owners continue to run the show. In fact, within the pharma market also, most people don’t know about that these distributors are owned by Keimed. Keimed’s financials are quite good. ROCE/ROE are more than 20%. Given its size and growth trajectory, this is a company which could list in another 2-3 years.

Part of Keimed’s success could also be the ability to supply to hospital and pharmacies by the listed company – Apollo Health Enterprise Limited (AHEL). Apollo Group has a successful pharma retail business as well – Apollo Pharmacies. That is a part of the listed company Apollo Health Enterprise Limited (AHEL), it is division of AHEL. This business reported revenue of Rs 28B in FY17.

In FY17, Keimed reported Rs 15B of sales to AHEL, in its ‘related party’ disclosure. So around 43% of its revenues came from AHEL as a customer. That is a huge advantage for Keimed.

Keimed is not owned by AHEL however. The ownership is in personal names, of which Shobhana Kamineni (vice chairperson of AHEL) appears to own the larger share. Japanese company Mitsui now owns 20% of common equity, having invested in 2015.

 

Advertisements

Posted in Pharma and Lifesciences | Tagged: , , , , , , , , , , , | 1 Comment »

RBI’ Revenge

Posted by fairval on October 28, 2017

India’s real interest rates are at rates rarely, if even, seen in its history. Why does RBI not lower rates? Revenge for getting screwed on Demo?

When demonetisation (DeMo) was announced by Prime Minister Narendra Modi (NaMo) in a dramatic press conference on 8th November 2016; several commentators said it was a bad move. The subsequent shoddy implementation and its inability to reveal any immediate black money – notes came back into the banking system – heightened the criticisms. Today, almost one year down the line, it is almost universally acknowledged that DeMowas a failure.

While the NDA government has faced flak for it, the central bank Reserve Bank of India (RBI) has faced even more criticism. When DeMo was announced, RBI had just passed under a new leader. The resignation was the previous governor – posterboy Raghuran Rajan (RR) – was mourned by many. Experts said NaMo had let RR go because he wanted a pliable chief. RR had crossed the line by making political observations; he was giving indications of being anti-NaMo.

When DeMo was announced, the experts immediate said ‘RR wouldn’t have done it’. The new RBI governor immediately became painted as a sinner; someone who sort of lowered the independence of the RBI. The ‘experts’ were also clear – from now on, RBI would dance to the tunes of the government.

Well, a year since DeMo, nothing of that sort has happened. RBI refuses to dance. Despite a slowing economy, and hugely comfortable inflation situation, RBI refuses to lower interest rates. The result – India’s real interest rates are at levels perhaps never seen before in Indian history.

Remember India has always been a high inflation country, and for most parts, we have operated in zone of negative real rates. But now, our real rates are above 4.5%. While one has not seen history of real rates since last few decades it is likely these levels could be all time high. When economy has clearly slowed, should they be so high? This level is also much higher than other countries (see chart below)

RBI.png

The Economic Survey (vol 2) released in Aug’17 by Ministry of Finance has a detailed section explaining the situation on real interest rates and suggesting how much should interest rates go down. Says the Survey – Cyclical conditions, then, suggest that the policy rate should actually be below—not 50-100 basis points or so above—the neutral rate. The conclusion is inescapable that the scope for monetary easing is considerable, more than that suggested by comparison with neutral interest rates.

So why is RBI not listening? Is it the RBI trying to leave no doubt in anyone’s mind about its independence? Or worse, is it trying put the government down for destroying its reputation with Demo? RBI’s revenge?

Posted in Indian Economy | Tagged: , , , , , , , , , , , , , | 2 Comments »

VC/PE deal space continues to see slowdown

Posted by fairval on December 14, 2016

Amount of investment in Indian VC/PE (and angel) space continues to see slowdown. This is from data for Jan-Nov’16 (Source: http://www.indiabusinessreports.com)

vcdealsnov16

YTD amount is just over USD8B, down 38% over last year, while deal count is down as well.

The decline is sharpest in internet based businesses, where investment is this year is just about a third of last year.

Posted in Data, PE/VC, Uncategorized | Tagged: , , , , | Leave a Comment »