The market has recently seen the re-rating of small companies in the FMCG and pharma sectors. FMCG players Dabur India and Emami witnessed the stocks of their recently-acquired companies, Fem Care Pharma and Zandu Pharma getting re-rated. Similarly, pharma companies, Cadila Care and Elder Pharma, have seen a lot of price action in the stocks of Zydus Wellness and Elder Health Care, respectively which were hived-off into independent companies respectively.
For a small pharma company with a handful of branded products, getting acquired by leading FMCG companies is obviously good news. The market has taken note of this in the case of Fem Care Pharma (acquired by Dabur India) and Zandu Pharma (bought by Emami). The FMCG parent is better placed to provide a good distribution platform to the products of the pharma company and also helps it to expand its reach.
In contrast, pharma companies hiving off their over-the-counter product business into separate units and listing them is also good news for the investors of the parent companies. Both Cadila Healthcare and Elder Pharma have done so and now each has a listed fledgling FMCG company – Zydus Wellness and Elder Health Care, respectively. For a pharma company, separating its branded-OTC business from its generic drugs business unlocks a lot of value hidden in the former business. And the stock market seems to have taken warmly to this value unlocking as is evident from the run-up seen in the stock prices of these fledgling FMCG companies.
Zydus Wellness’ stock price has witnessed a sharp rise of 347% in the past one year. It has significantly outperformed the Sensex, whose 74% returns over the same period appear relatively modest. Elder Health Care has also outperformed the Sensex, rising 127%. Zandu Pharma has risen 37% while Fem Care Pharma has shown the least increase of 15% over the past year. Interestingly, most of the price appreciation in case of Fem Care Pharma was witnessed between August and December 2008, as the stock witnessed a surge of 172% during the period.
Once these stocks get re-rated, they will command valuations more fitting to small-sized branded players in the FMCG space. The performance of their respective businesses will then decide the future valuations of these companies.