Pharma - Sector Update - Strong growth leads to re-rating: Centrum

Strong growth leads to re-rating



We expect pharma industry to perform well on both domestic and global
fronts due to good growth across geographies. Despite price cuts under
NPPP, the domestic pharma market is expected to report good growth in
FY15 on a lower base. On exports too, companies are likely to report
strong growth for existing products and new launches in the US
generics market.  All these should lead to companies under our
coverage to report 19%YoY growth in revenues, 24% growth in EBIDTA and
30% growth in net profit during Q1FY15. Lupin, Aurobindo Pharma (APL)
and Pfizer remain our best picks. Key risks to our assumptions include
slowdown in the domestic pharma market and risks from global
regulatory agencies.

$ Domestic pharma market –  on a growth path: The domestic pharma
market is likely to report good growth from Q1FY15 onwards as the
Government has allowed 6.3% increase in prices for the 348 price
controlled drugs and up to 10% per annum for drugs outside price
control. This is likely to benefit the entire pharma industry. After
the announcement of price control on 348 drugs, the domestic pharma
market fell to 6.8% in Sept’13 from 8.2% in August’13. We expect the
growth momentum to continue due to the recent price revision and new
product introductions.

$ Companies under coverage to report healthy growth:  For Q1FY15, we
expect the 13 pharma companies under our coverage to report 19%YoY
growth in revenues, 24% growth in EBIDTA and 30% growth in net profit.
We expect 90bps improvement in EBIDTA margin to 24.4% from 23.5% due
to good growth in both domestic and export markets. Companies under
our coverage constitute 36% of the domestic pharma market and are
expected to perform well due to the recent price revision by NPPA and
lower base.

$ Expectations from Union Budget: The pharma sector expects exemption
for exports from service tax and MAT and also for SEZ units from MAT.
The industry expects further exemption on R & D equipment and capital
goods from excise and customs duties. There is a demand to allow 100%
FDI in pharma and biotech sectors through the automatic route. The
200% weighted average deduction for in-house R & D should also include
patent filing fees and global clinical trial expenses. We expect the
Government to exempt exports from service tax and MAT and SEZ units
from MAT.

$ Recommendation & key risk:  We have rolled our target prices to
June’16E EPS from Mar’16E EPS.  We have changed the target multiple
for Dishman Pharma (DPCL) to 10x from 8x and for Pfizer to 19x from
18x in expectation of improved performance. Pharma companies have
outperformed the Nifty during the last month due to a sector switch.
Lupin, APL and Pfizer remain our preferred picks in the pharma space.
Key risks to our call will be 1) slowdown in the domestic pharma
market 2) Regulatory risks from international agencies for
manufacturing facilities located in India.



Thanks & Regards

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Granules India - Initiating Coverage - Achieving higher altitude in performance: Centrum

Rating: Buy; Target Price: Rs720; CMP: Rs545; Upside: 32%



Achieving higher altitude in performance



We initiate coverage on Granules India (GIL) with a Buy
recommendation. GIL has a unique business model with its presence over
the entire pharma value chain and derives over 80% of its revenues
from exports. The company is the world’s largest producer of PFIs and
hence is a preferred supplier to MNC pharma companies. With the recent
acquisition of Auctus Pharma (APL), the company has expanded product
offerings and added new customers.  We expect GIL to achieve 25%CAGR
in revenues, 30%CAGR in EBIDTA and 33%CAGR in net profit over the next
three years. Our target price of Rs720 is based on 10xJune’16E EPS of
Rs71.5. Key risks to our call include quality rejections and failure
impact due to large batch size and regulatory risks for its
manufacturing facilities.

$ Unique business model: GIL offers all three components of pharma
value chain namely APIs, PFIs and finished dosages thus giving the
customer flexibility and choice. The company has the largest PSI
facility in the world with 6MT batch size thereby offering economies
of scale. GIL offers end-to-end solutions for pharmaceutical
manufacturers’ requirements. The company has an installed capacity of
20,200tpa for APIs and 14,400tpa for PFIs and 18bn dosage forms per
annum. It is among the largest in the world and attracts MNC pharma
companies. We expect global pharma companies to immensely benefit from
the unique use of PFIs as it will lead to significant savings in cost
and time.

$ Substantial cost savings: GIL offers large capacity and batch size
thereby giving price-value proposition and effective supply chain
management. The use of PFIs results in substantial cost saving as it
forms ~80% of the asset cost in oral dosage manufacturing thereby
offering an ‘Asset Light Model’. The use of PFIs also reduced process
time leading to substantial reduction in working capital and number of
vendors. We expect improvement in GIL margins with increased usage of
PFIs by MNC pharma companies.

$ Acquisition to widen product basket: GIL offers five APIs to its
customers namely paracetamol, metformin, ibuprofen, guaifenesin and
methocarbamol. With the acquisition of APL in February’14, GIL has
added 12 new APIs to its product offerings. These products have a
potential market size of $37bn (Rs2,220bn). GIL has plans to supply
PFIs and finished formulations for these APIs and widen its product
offerings. The company offers unique rapid release tablets, bilayer
tablets and extended release (ER) tablets, strengthening the
customer’s competitive advantage. We expect the company to increase
the client base with additional offerings of APL products.

$ Valuation and key risks: GIL has achieved 26%CAGR in revenues,
27%CAGR in EBIDTA and 33%CAGR in net profit over the past 10 years.
We expect the company to maintain the growth momentum due to its
presence over the entire pharma value chain and additional product
offerings from APL. We expect GIL to report 25%CAGR in revenues,
30%CAGR in EBIDTA and 33%CAGR in net profit over FY14-17. We initiate
coverage on GIL with a Buy rating with a target price of Rs720 based
on 10x June’16E EPS of Rs71.5 with an upside of 32.1% from the CMP.
Key risks to our call include quality rejections and failure impact
due to large batch size and regulatory risks for its manufacturing
facilities.



Thanks & Regards