Oxygen fuelled Linde’s stock; vaccine cold chain may be next. Watch if the dream run continues.

By: Priyanka Salve

ET Prime

Oxygen cylinders have saved more lives in the last six months than they ever did in the last many years. Thanks to Covid-19, which aects a patient’s respiratory system, oxygen cylinders were in high demand. While the virus broke the back of the economy of the biggest countries, investors were looking for pharma stocks and other allied industries which could benet from the pandemic. A top draw was the oxygen-cylinder industry, in which Linde India was a major listed manufacturer. Naturally, its stock price was on re. Mutual funds and retail investors got excited, except that the only problem was that medical cylinders are just a small part of Linde's business. The company did run the business at full capacity, yet the growth in prots was limited, as its main business is industrial cylinders. Will the company now invest more in oxygen cylinders to ride the boom? Unlikely. So, what happens when Covid-19 vaccines get released? Will the demand for these cylinders remain robust? That’s the question that is foxing investors. For the last two years, Linde India’s stock has seen its fortune rise every winter. Given that the company is one of the biggest suppliers of medical oxygen in India, one can guess that increased demand for oxygen during winter months due to respiratory illnesses might be responsible for the spurt. But then Linde India is also a business in transition. Its parent company, Linde Plc announced a merger with peer Praxair Inc in December 2016 and the same was completed towards the end of 2018. This was followed by an attempt to delist the Indian subsidiary, Linde India, in November 2018, which was unsuccessful due to issues around the delisting price. Reports in November 2019 said that the parent company could again try to delist the shares. Then came the pandemic. On February 20, the shares of Linde India were at a high of close to INR780 but by March 23, when the broader market saw its sharpest fall, they fell to INR413 apiece. Since then, the stock has had a fantastic run, rising over 100% till date. There has been an increase in the number of mutual funds, retail shareholders, and foreign portfolio investors buying the share. While no brokerage tracks the stock, there are indications that the euphoria around the stock is due to the rising need of medical oxygen, of which Linde is among the top suppliers to hospitals. For the nine months ended in September, Linde India reported total revenue of INR996 crore as compared to INR1,349 crore in the nine months a year ago, or down 26% y-o-y. The net prot of the company for the nine months stood at INR943 crore, up just 2% year on year. “If you are investing in Linde based on the play that the vaccine is going to come and the demand is going to pick up from a health-infrastructure point of view, then it is a tactical investment and not a long-term outlook investment made on fundamentals,” says a founder of a wealth-management rm, who despite tracking the company, has yet to join the rally. He also added that the low oat also means that stock could see sharp falls if the promoter decides to cut its stake as happened in the case of GMM Pfaudler. So, with no further clarity on a possible second attempt of delisting and hardly any signicant nancial boost driven by the demand for gases for the healthcare sector, is the rally justied? While the opportunity to drive growth from higher sales of medical oxygen may have been dampened due to price controls of the government implemented since September, the company’s strong presence in liquid nitrogen supply and dry ice may result in an earnings expansion as the world prepares for a Covid19 vaccine drive. 2020: a year of mied fortunes In the company’s annual report released in late July, Linde India’s management did not sound too optimistic about its prospects in 2020. It said that the economic conditions in India and globally are threatening economic growth, which would aect all sectors, including the gases industry in India. “The signicant downturn in the automotive sector, which is one of the important users of industrial gases, poses some challenges. Aggressive addition of new merchant capacities by competitors in an already competitive marketplace and some of the steel majors implementing plans to set up air separation units may have an adverse impact on the fortunes of the gases industry and price in certain geographies,” the company said in its annual report for calendar year 2019. / "If you are investing in Linde based on the play thatthe vaccine is going to come and the demand is going to pick up from a health-infrastructure point of view,then itis a tactical investment and not a long-term outlook investment made on fundamentals." — Founder of a wealth-management rm On the other hand, the company added that the spread of Covid-19 in India has presented a great opportunity in the healthcare sector. “This industry oers a tremendous scope of infrastructure growth across the country especially in tier II and tier III cities. Besides, your company also sees opportunity in the fastgrowing food and beverages market,” it said in the annual report. As of September, the company had achieved 85%-90% of pre-Covid19 sales volumes, which in March had dipped to 30%. Yet, recovery in key sectors such as reneries, automotives, and manufacturing has been missing. According to credit-rating agency Crisil’s report on Linde in August, the gases segment, which accounts for 85% of the company’s revenues, is largely dependent on the steel and metallurgical industries to drive growth in India. This contrasts with its parent Linde Plc, which gets 20% of its revenues from healthcare, the highest share, followed by manufacturing. According to Linde India’s annual report for calendar year 2016, the healthcare segment accounted for 7% of gross sales of the company. In a presentation to its shareholders in August this year, Linde India said that demand for medical oxygen had risen by 200%. But given that demand from other key businesses such as manufacturing and automotives is yet to return, healthcare could only minimise the downturn’s impact on the company’s protability. Moreover, there are other suppliers of medical oxygen in India and in September, the government imposed a price-control on medical oxygen. Untilthe vaccine is ready Earlier this month, US-based Pzer and BioNTech announced that their Covid-19 vaccine had shown over 90% eicacy. A few days later, US-based Moderna also announced similar results. But Pzer’s vaccine needs to be kept at -70°C and will last for only 24 hours at refrigerated temperatures between 2°C-8°C. Moderna’s vaccine too requires refrigeration at -20°C temperature. India’s polio-immunisation programme has ensured that it has a cold chain supply network for vaccines requiring -20°C to -25°C. However, this network will fall short, given that close to 1,350 million people will have to be covered and not just children under the age of 5. As for the Pzer-BioNTech vaccine, India does not have the required cold chain capacity. In a recent interview with a news channel, Soumya Swaminathan, a chief scientist at the World Health Organization, said that while companies are trying to nd ways to bring down temperature requirements, one solution could be the use of large quantities of dry ice. “The vaccine will be transported in cryogenic containers with temperatures between -70°C and -80°C created using dry ice orliquid nitrogen,” says Amit Rajan, managing director of Prosfora Technologies. “Linde not only makes these two ingredients, but also produces the containers for most ofthe logistics companies, since these can only be made by the company which supplies the ingredient — liquid nitrogen or solid ice.” One of Linde India’s strengths is that it is the largest producer of liquid nitrogen in India. The makers of the Pzer-BioNTech vaccine and Russia’s Sputnik V vaccine are also considering freeze-drying or lyophilisation of the vaccine to make it keep it stable at around -20°C. This method is also likely to reduce breakage and damage, which are more frequent when transporting liquids. According to Rajan, increased use of freeze-drying is also being seen in pharmaceutical drugs like Remdesivir. He also foresees potential for using the technology in the food and beverages segment. The bottom line Compared to its global peers, Linde India’s stock seems to be undervalued, as it trades at a price-to-earnings ratio of 10x, which is among the lowest. In India, while there isn’t a listed player with which the company can be compared, the Inox group comes close, with Inox Air Products, its joint-venture company with US-based industrial-gases company Air products Inc. Given its lineage, Linde India has the technology to service a multitude of sectors, but it has been limited historically by its high exposure on cyclical sectors such steel and reneries. Its high installed capacity and the pandemic-led growth in the healthcare business segment, could turn the odds in the company’s favour. 

Source: https://economictimes.indiatimes.com/prime/money-and-markets/oxygen-fuelled-lindes-stock-vaccine-cold-chain-may-be-next-but-watch-if-the-dream-run-continues-/primearticleshow/79431774.cms?utm_source=newsletter&utm_medium=email&utm_campaign=prime_dailynewsletter_paid&utm_content=heading_8&ncode=ae88c8a4f8742a8682bf7d9294253f7f