Panacea Biotec In-line; Raise target price: EMkay

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Panacea Biotec

In-line; Raise target price and maintain hold

HOLD

CMP: Rs218                                        Target Price: Rs241

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n     Panacea Biotec’s Q2FY11 PAT was impacted by higher tax provisioning. Revenues at Rs2.56bn (est. of Rs2.47) and, b) EBITDA at Rs564mn (est. of Rs580mn) were in-line

n     Revenues were driven by a) 61% growth in vaccines (Easyfive contributed revenue of Rs723mn) and b) 37% growth in pharma formulation business

n     Higher tax provision (41% vs. est. of 24%) and higher interest cost (up 14% YoY) restricted PAT at Rs190mn vs. est. of Rs256mn

n     Earning estimates revised upward by 6% to Rs18 and Rs24 for FY11E and FY12E respectably, owing to buy back of equity; Raise target price and maintain Hold rating

52% revenue growth is aided by strong traction across the segment

Panacea has reported robust revenue growth of 52% largely driven by a) strong traction

in Easy five (Rs723mn vs. Rs243mn in Q2FY10) resulted 61% growth in vaccine

business and b) 37% growth in the pharma business. Commencement of supply of

organ transplant products in Lat Am countries resulted in 285% growth in export pharma

formulation segment. Domestic pharma business for the quarter grew by 18% to

Rs659mn. The supply of Easyfive to UNICEF under new contract began from Jan’10

onwards and company has a long term contract worth US$222mn to be executed till

Dec’2012. This imparts long term visibility to the vaccine business.

Favorable product mix improved operating performance

Though operating margins on a YOY basis were up 751bps to 22%, margins were down

178bps QoQ on account of lower currency realization and lower contribution of Easy

Five vaccine of Rs723mn in Q2FY11 vs. Rs880mn in Q2FY10. Margin expansion was

also aided by lower contribution of low margin TOPV vaccine

APAT impacted by higher tax provisioning and interest outgo

The PBT for the quarter grew strongly to Rs307mn driven by robust revenue growth and

strong operating performance. However, higher tax provisioning (41% vs. est. of 24%) and

interest cost (up by 14% YoY) restricted expansion in net profit margin to 7.4% in Q2FY11.

We believe higher tax provision was mainly because of lower utilization of MAT credit.

However for FY11E as a whole, management has guided 23% tax rate. Similarly, on

interest front, company expects the cost to rise in the coming quarters because of high

working capital utilization. EPS for the quarter and H1FY11 stood at Rs3.1 and Rs8.6

respectively, against our full year expectation of Rs16.9.

Completed buy-back of 5.59mn shares at a average price of Rs196.39

Panacea Biotec has bought back 5.5mn shares for a total consideration of Rs1090mn

through internal accruals. Post buy-back of 6.2% of the equity, the promoter stake has gone

up to 72.7% and the equity of the company has come down to 61.6mn shares. Panacea is

also going to redeem FCCB worth US$36.5mn (US$52.55mn including YTM; conversion

price-Rs357.57) by February 2011, funded through both internal as well as external

accruals.

Raise earning estimates and target price; maintain Hold

Owing to in-line performance, we maintain our profit estimates of Rs1128mn and

Rs1506mn for FY11E and FY12E respectively. However, our EPS estimates have been

revised upward by 6% to Rs18 and Rs24 for FY11E and FY12E respectably owing to

reduction in equity. With Easyfive supply in full swing, we expect a significant jump in

revenue in next two years. This will not only improve the top-line of the company but also

have positive impact on the bottom-line as realization in Easyfive is even higher than MOPV

vaccines. Rolling over the target price on FY12E, we raise the target price on the stock to

Rs241 from Rs209. We retain our Hold rating on the stock.