JB Chemicals to exit Russia-CIS market

JB Chemicals & Pharmaceuticals Ltd plans to exit Russia and the CIS (Commonwealth of Independent States) markets, its largest overseas presence.

In a statement to the stock exchanges, JB Chemicals said that in its forthcoming May 23 board meeting to announce its results, it will also review its Russia-CIS business. It will consider disinvesting this business, but did not give further details. It said the decision will help strengthen its pharmaceutical business, and help realise the high growth potential in markets such as India.

JB Chemicals is a key player in the Russian market and was the third largest player, after Ranbaxy Laboratories and Dr Reddy’s Laboratories, according to a company presentation. JB entered this market in 1992 and its main markets include Russia, Ukraine, Uzbekistan, Kazakhstan, Azerbaijan and Tajikistan.

In 2009-10, JB Chemicals’ sales from this market was $73 million or about Rs 330 crore, and grew by about 8%. In Russia, some of its key brands are Doktor Mom, a cough syrup, Rinza, for colds and flu, and Metrogyl for stomach-related ailments.

Its Doktor Mom brand is quite popular in the Russian market. Its top three brands contribute to 90% of sales, and it distributes products through a subsidiary. It employs about 400 people in the region, of which 180 people are in Russia.
The Russian pharmaceutical market has been a high growth one for Indian pharmaceutical majors. The economy has been doing well and disposable incomes have been rising. Dr Reddy’s sales in Russia in the March 2011 quarter rose by 39% year-on-year.

While the region is prospering, it is a volatile one, both on the currency and economic front. This wreaks havoc on Indian companies’ financials every now and then. Another disadvantage is that the business runs on relatively higher number of receivable days. Having a local subsidiary reduces the risk, but working capital requirements can stretch the balance sheet.

This will be a key disposal for JB Chemicals, as the Russian/CIS market contributed to over 40% of sales in 2009-10. Selling it will result in a big drop in its sales. But the company may have got a very good offer for the business. The company is not laden with debt, with Rs 159 crore of loans as of September 30, compared to a net worth of Rs 679 crore. JB Chemicals could also use the money to increase its presence in the Indian market.

Both large domestic and multinational pharmaceutical companies are eyeing an increasing share of the market. JB Chemicals could use the funds to acquire some brands or enter new categories and geographies. The drop in sales by exiting the Russian/CIS market may not get bridged immediately, but eventually if it can get its domestic act together, its growth rate and profitability could improve.

The share price had fallen by about 2% at the time of posting.

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