Panacea Biotec -Sep10 bounces back on a low base: Avendus

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Panacea Biotec
Target Price (INR) 211 
Sep10 bounces back on a low base



PNCB reported 52% growth in net revenue in the Sep10 quarter, at
INR2.5bn. The growth, however, comes off a low base in the Sep09
quarter where vaccine revenues had suffered a setback, primarily on
account of depressed OPV sales ‐ led by program changes in the Global
Polio Eradication Initiative and potency/quality issues surrounding
MOPV1. The 38% growth in the pharmaceutical formulations business
is encouraging, representing the second consecutive quarter of strong
momentum. The company concluded its buyback offer in mid‐October
‐ financed through leveraging the balance sheet. Interest expenses are
likely to mount as the company services its growing debt. We roll over
our target price to Dec11 and raise it to INR211. Maintain Hold.


2QFY11 revenues bounce back on a low base
PNCB reported strong 52% growth in net revenue in the Sep10 quarter, at
INR2.5bn. Vaccine revenue, at INR1.7bn, was 62% higher y‐o‐y. The sharp
growth, however, has to be viewed in light of a very low base in the Sep09
quarter. Led by program changes in the Global Polio Eradication Initiative and
potency/quality concerns raised by the DCGI/WHO on the company’s MOPV1
products, vaccine sales in the Sep09 quarter suffered a setback. OPV revenue
during the quarter settled c24% higher, at cINR8.9bn. Revenue from EasyFive
jumped almost 3x to INR723mn, on the back of deliveries under the USD22mn
UNICEF contract. The management maintains its revenue guidance from
vaccine sales at INR7.9bn.

Pharma sales report second consecutive quarter of strong growth
2QFY11 reported sustained growth in pharmaceutical formulation revenue, at
38%. Within the segment, exports, which constitute c20% of pharmaceutical
sales, leaped forward on the back of strong growth in markets, including Brazil,
Russia and Philippines. Domestic revenues grew 18% during the quarter.

Buyback done with; concerns on the balance sheet remain
The company concluded its buyback offer in mid‐October, where it bought back
5.6mn equity shares at an average price of INR196.39/share. The buyback was
funded (INR1.1bn) through debt, and consequently, PNCB’s total debt
(standalone) stands higher by c38% from Mar10. In Feb11, an FCCB amounting
to USD36.8mn (INR1.7bn) matures. Including a premium of 42.8%, PNCB is
likely to be faced with a payment liability of at least INR2.3bn, which is likely to
be funded by swapping the existing bonds with a larger, high‐cost leverage.
Interest expenses are likely to mount as the company services its growing debt.

Largely maintain estimates; rollover target price to Dec11
We largely maintain our estimates during FY11f‐FY13f. The management
maintains its revenue guidance of INR11.2bn for FY11f; we stand c5% lower, at
INR10.6bn. Increasing leverage on the company’s balance sheet remains our
key concern. We roll over our target price to Dec11 and raise it to INR211. We
maintain our Hold rating.