Merck Pharma Buy- Q1CY13Result Update ::Centrum

Good sales growth, but margin disappoints
Merck’s revenues for Q1CY13 were in line with our expectations but EBIDTA margin and net profit were below our estimates. The company reported 24%YoY growth in revenues, 170bps decline in EBIDTA margin and 13% growth in net profit. The growth was driven by the pharma business (63% of revenues), which grew by 28%YoY. The chemicals business (37% of revenues) grew by 20%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 downwards by 3% each. We have a Buy rating for the scrip with a revised target price of Rs878 (based on 14x June’14E EPS of Rs62.8).
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Strong growth in pharma business: Merck reported 24%YoY growth in revenues from Rs1.46bn to Rs1.82bn due to the strong growth in pharma business. The company’s pharma business (63% of revenues) grew by 28%YoY from Rs929mn to Rs1.19bn. The growth was way ahead of domestic pharma market growth of ~11%. The company’s chemical business (37% of revenues) grew by 20%YoY from Rs575mn to Rs688mn.
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Strong margin improvement: Merck’s EBIDTA margin declined by 170bps YoY from 11.2% to 9.5% due to the increase in material cost and other expenses. The company’s material cost went up by 210bps from 41.6% to 43.7% of revenues due to the change in product mix. Merck’s personnel cost declined by 280bps from 15.6% to 12.8% due to higher sales growth. Other expenses went up by 220bps from 31.7% to 33.9% of revenues. On a QoQ basis, margin declined by 560bps from 15.1% to 9.5%.

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Strong growth in pharma business: Merck reported strong growth of 28% in the pharma segment. As per IMS MAT-February’13 data, the company reported 11.2% growth against the industry growth of 10.6%. Its major brands Neurobion Forte and Evion grew by 5.6% and 5.3% respectively. We expect these brands to drive future growth of the company.
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New product launches: Merck launched six new products in CY12. These are: Nasivion day & night tablets, Nasivion allergy tablets, Prenone tablets, Carbophage Forte tablets, Dvion sachet and Neurobion Forte RF injection. These products are also likely to drive the future growth of the company.
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Valuations: We have revised our CY13 and CY14 EPS estimates downward by 3% each respectively. At the CMP of Rs626, the stock trades at 10.9x CY13E EPS of Rs57.3 and 9.2x CY14E EPS of Rs68.2. We have a Buy rating for the scrip with a revised target price of Rs878 (based on 14x June’14E EPS of Rs62.8) with 40.3% upside over CMP.