Merck - Q4CY12 - Result Update - Centrum

Q4CY12 Result Update

Merck

Buy

Target Price: Rs831

CMP: Rs664

Upside: 25%

Good overall growth

Merck results for Q4CY12 were better than our expectations. The company reported 24%YoY growth in revenues, 1,230bps improvement in EBIDTA margin and net profit of Rs201mn against loss of Rs16mn. The growth was driven by the pharma business (63% of revenues), which grew by 29%YoY. However, the chemicals business (37% of revenues) grew by 15%YoY. Merck is a debt-free company with cash/share of Rs116. We expect the growth momentum to be maintained due to strong growth in the pharma business and benefits from NPPP. We have revised our CY13 and CY14 EPS estimates upwards by 9% and 8% respectively. We have a Buy rating for the scrip with a revised target price of Rs831 (based on 14x CY13E EPS of Rs59.3).

m  Strong growth in pharma business: Merck reported 24%YoY growth in revenues from Rs1.35bn to Rs1.68bn due to the strong growth in pharma business. The company’s pharma business (63% of revenues) grew by 29%YoY from Rs847mn to Rs1.09bn. The growth was way ahead of market growth of ~9%. The company’s chemical business (37% of revenues) grew by 15%YoY from Rs547mn to Rs628mn.

m  Strong margin improvement: Merck’s EBIDTA margin improved by 1,230bps YoY from 2.8% to 15.1% due to overall reduction in costs. The company’s material cost declined by 150bps from 45.0% to 43.5% of revenues due to the change in product mix. Merck’s personnel cost declined by 500bps from 15.4% to 10.4% due to higher sales growth. Other expenses declined by 590bps from 36.8% to 30.9% of revenues. However, on a QoQ basis, the margin declined by 410bps from 19.2% to 15.1%.

m  Strong growth in pharma business:  Merck reported strong growth of 29% in the pharma segment. As per IMS MAT-November’12 data, the company reported 12.2% growth against the industry growth of 12.0%. Its major brands Nasivion and Polybion C grew by 18.9% and 12.3% respectively. However, Neurobion Forte and Evion had a lower growth of 6.1% and 5.3% respectively.

m  Benefit from NPPP:  Merck’s three major products Neurobion, Polybion and Evion are currently under DPCO. However, under NPPP, Evion would come out of price control. This product has annual sales of ~Rs500mn. This is likely to benefit the company. Another of its major brands Nasivion (revenues Rs340mn) will continue to remain outside price control. Moreover, the company is likely to benefit from its Vitamin E API that will come out of price control.

m  Valuations: We have revised our CY13 and CY14 EPS estimates by 9% and 8% respectively.  At the CMP of Rs664, the stock trades at 11.2x CY13 and 9.5x CY14 earnings. We have a Buy rating for the scrip with a revised target price of Rs831 (based on 14x CY13 E EPS of Rs59.3) with 25% upside over CMP.

Thanks & Regards, 

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