Sustainable growth Elder Pharma’s (EPL) :: Centrum

Sustainable growth
Elder Pharma’s (EPL) results for Q2FY13 were in line with our
expectations. The company reported 22%YoY growth in revenues,
140bps decline in EBIDTA margin and 26%YoY growth in net profit.
The sales growth of domestic operations was 19%YoY whereas that of
overseas subsidiaries was 30%YoY. The merger of Elder Healthcare
(EHL) with EPL had no major impact on the overall performance of
EPL. We do not expect major negative impact from the new pharma
policy on the company. We have a Buy rating for the scrip with a
target price of Rs429 (based on 7x FY14E EPS of Rs61.2) with an
upside of 43.8%.
Good sales growth: EPL reported 22%YoY growth in revenues from Rs3.32bn
to Rs4.05bn. The domestic business (75% revenues) grew by 19%YoY from
Rs2.53bn to Rs3.02bn. The overseas subsidiaries NeutraHealth, UK and
Biomeda, Bulgaria (25% of revenues) collectively reported 30%YoY growth
from Rs784mn to Rs1,022mn.
Margin under pressure: EPL’s EBIDTA margin declined by 140bpsYoY from
16.6% to 15.2% due to the sharp rise in the material cost. Material cost grew
by 360bps from 50.0% to 53.6% of revenues due to the rise in imported raw
material cost with rupee depreciation. Personnel cost declined by 80bps YoY
from 14.1% to 13.3% due to strong sales growth. Other expenses declined by
140bps from 19.3% to 17.9%.

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Leading brands growing well: EPL’s three major brands are growing faster than the
market. As per IMS MAT-August’12 data, the company reported lower growth of 10.3%
against the industry growth of 12.4%. EPL’s three major brands grew as follows: Shelcal
13.8%, Chymoral 21.1% and Shelcal-CT 14.8%. These flagship brands contributed ~36%
to the domestic revenues and are likely to drive future growth.
No major threat from new drug policy: EPL has three major products in the top 300
list. Its major brand Chymoral is outside DPCO and will continue to remain outside price
control under NPPP. EPL’s flagship brand Shelcal is currently outside DPCO and will also
be outside price control as it is a combination brand.
Valuations: We expect EPL to benefit from good growth in the domestic market from
existing products and the introduction of new products. Overseas subsidiaries are
expected to report better performance and break even in FY14. At the CMP of Rs298,
the stock trades at 6.5x FY13E EPS of Rs45.9 and 4.9x FY14E EPS of Rs61.2. We have a Buy
rating for the scrip with a target price of Rs429 (based on 7x FY14E EPS of Rs61.2) with
an upside of 43.8%.