Merck a good long-term stock: Rajen Shah

Merck is a good long-term stock, says Rajen Shah, CIO Angel Broking.

Shah told CNBC-TV18, "Merck is basically 52% subsidiary of Merch Germany, which is 18 billion euro marketcap company. It is a significant player in the global pharmaceutical and chemical business."
He further added, "Interesting thing has happened in Merck but market seems to have not noticed this. On March 6, this year at the board meeting of Merck Germany – I am talking about Merck Germany and not Merck India – its chairman Karl-Ludwig Kley very clearly mentioned that the next three-four years are going to be extremely challenging for Merck Germany and the strategy now would be to address inefficiencies, free up resources and invest in promising growth markets. Now obviously the reference was to Asia and China and India in particular. So reading between the lines, I believe that this subsidiary of Merck Germany, which has been ignored and not sort of seriously looked at by the parent for so many years now would see increased attention and renewed investor interest in the coming months and years."
"Now so far the financials have not been too good. This company has been growing at a slow pace of 10% every year for the past five years, the net profit grows at about 10% and it is a Rs 600 crore company, so nothing great to talk about. But looking at what the parent has said in the board meeting, three months back, I believe that there should be a renewed interest in this counter in the coming months and years."
"Financially, this year the company would report about Rs 40 kind of earnings, the stock is at about Rs 560 so it is trading at about 14 times that is reasonable. But if you look this stock from a marketcap to sales perspective, the stock is looking very cheap. If you look at Wyeth, the turnover is around Rs 625 crore, marketcap is about Rs 2,000 crore. If you look at Novartis, the turnover is about Rs 850 crore, marketcap is Rs 2,400 crore that is again three times the sales and Pfizer turnover is about Rs 1,070 crore or so and the marketcap is Rs 3,300 crore so again three times the sales. So Wyeth, Novartis, Pfizer these all three companies are trading at an average of three times the sale."
"At three times the sales, Merck this year would report about Rs 600 crore of turnover. So at three times the sales, the marketcap should be Rs 1,800 crore whereas the current marketcap is about Rs 925 crore. So reasonable P/E, decent valuations based on marketcap to sales and renewed interest by the parent company should re-rate the stock in the coming years. So it is a good long-term stock wherein the risk is very low and the reward could be reasonably good."
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Disclosure: I have no personal holding in the above stock.