MNC pharma brands - Sector Update - MNC Brands to command premium: Centrum

MNC Brands to command premium



We expect MNC pharma companies’ share to go up to 20% in FY15 and 21%
in FY16 in the domestic pharma market due to price increase of 6.3% in
price controlled products in April’14 as well as volume growth. The
eight MNC pharma companies generated 19% revenues in the domestic
market in Q1FY15. These companies have 74 brands (25% of total) among
the top 300 brands indicating strong brand building. These brands have
strong recall in the doctor’s chamber. We expect good volume growth
for the brands which faced price reduction in Sept’13 and July’14.
Pfizer is our top pick among the MNC pharma companies.

$ MNC pharma accounts for 19% of domestic market: As per IMS
MAT-April-June’14 data, the eight MNC pharma companies generated 19%
of domestic revenues thereby occupying a strong position in the
domestic pharma market. We expect this share to go up to 20% in FY15
and 21% in FY16 due to 6.3% price increase in price controlled
products in April’14 as well as volume growth due to price reduction.
These companies have 74 brands (25% of total) among the top 300 brands
in the domestic market.

$ Shift to major MNC brands likely after price cuts: The 74 major
brands of eight MNC pharma companies accounted for 47% of their
revenues. Novartis India’s (NIL) seven major brands contributed ~66%
of its revenues and hence the company has high dependence on its
brands. We expect these brands to drive future growth despite price
control due to their quality and reliability. Some of these brands are
30-40 years old and are well-entrenched in the domestic market. With
the fall in price of some of these brands under NPPP in Sept’13, we
expect a shift from competing brands to MNC brands thereby gaining
volumes.

$ Drug prices revised upward: For price controlled products, pharma
companies have increased prices by 6.3% based on the Wholesale Price
Index (WPI) in April’14. Moreover, 108 brands that came under price
control in July’14 will be eligible for up to 10% increase in price
per annum in July’15. We expect good volume growth for products from
these brands which will partly off-set the effect of price reduction.
The major beneficiaries would be: GSK, Pfizer, Novartis India, Sanofi
India and Wyeth.

$ Pfizer remains preferred pick: Pfizer continues to be our best pick
among MNC pharma companies. It is likely to benefit from the merger
with Wyeth as the merged company would have 14 brands in the top 300
brands. Their key brands Dolonex, Minpress XL, Wysolone, Prevenar 13,
Ativan and Corex Dx have shown over 17% growth and are likely to drive
future growth.  Key risks to our assumptions include additional MNC
brands coming under price control and slower growth in domestic pharma
market.



Thanks & Regards

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Atul Auto - Initiating Coverage - The GEM on three wheels: Centrum

Rating: Buy; Target Price: Rs800; CMP: Rs651; Upside: 23%



Operating performance remains strong; retain Buy



We retain Buy on Atul Auto (Atul) with revised TP of Rs800. Better
than expected operating performance reflects benefits arising from
operating leverage. 1QFY15’s EBITDA margins at 9.6% was better than
our estimate of 8.6%. The company continues to add dealership network
with total touch points now at 303. Given its current scale, we
believe that penetration will be largely done and focus would be on
optimizing new dealerships from FY16E. The petrol 3W project is on
track and the vehicle is likely to go for the Automotive Research
Association of India’s (ARAI) testing in the next 3-4 months. Based on
current status, the company is confident on its launch soon after ARAI
approval. The vehicle has already undergone testing and done well on
all parameters.

$ Operating performance remains strong: Atul’s growth momentum
continued with YoY revenue growth of 16% at Rs992mn. ASP remained
healthy at Rs117,598/unit registering a growth of 4%YoY and 1%QoQ.
EBITDA margins stood at 9.6% vs. our estimate of 8.6%, improvement of
113bps YoY, while EBITDA/unit stood at Rs11,325. Driven by strong
revenue growth and better operating performance, adjusted PAT stood at
59mn, beating our estimate by 10%. Reported PAT stood at Rs97mn, due
to higher other income (write back of bad debts).

$ Dealer expansion continues, consolidation phase from FY16E: Atul
continues to add touch points with primary dealers now at 193 vs. 180
in FY14 and secondary dealership at 110. The company now has 303 touch
points. Post the launch of the Petrol vehicle, the company plans to
penetrate Tamil Nadu and West Bengal (they currently account for only
5% of total domestic 3W industry volumes). The current expansion of
dealers is within the states in which it is present but is relatively
lower as compared to peers. By end FY15, the company is targeting
240/150 primary and secondary dealers, taking the total touch points
to 390.

$ Petrol project on track: Management indicated that the petrol 3W
project was on track and the vehicle will go for homologation test to
ARAI soon. The approval from ARAI will take 3-4 months and the vehicle
is likely to be ready for launch soon after ARAI’s approval.

$ Valuation and Recommendations: Retain Buy with a revised TP of
Rs800. We now value the company at 15x September’16E EPS as we believe
that strong earnings (FY14-FY16E earnings growth of 30% implying PEG
of 0.5x), healthy return ratios and the ability to generate free cash
flow can lead to further re-rating of the stock, with further market
share gains, if any, adding to the icing. Key risks to our thesis are
a) Delay/failure of petrol powered 3W b.) Delay in capacity addition.



Thanks & Regards,