Margin under pressure Elder Pharma :Centrum

Margin under pressure
Elder Pharma’s (EPL) results for Q4FY13 were below our expectations. The company reported 7%YoY decline in revenues, 210bps drop in EBIDTA margin and 3%YoY decline in net profit before EO items. EPL’s top three products account for 35% of revenues. The company is unlikely to get impacted by the New Pharmaceutical Pricing Policy (NPPP). The company has extended the year end from March’13 to June’13. The EO item of Rs52.5mn was forex gain on currency fluctuation on foreign loans. We have revised our rating from Buy to Neutral for the scrip and revised the target price downward from Rs427 to Rs307 (based on 7x Dec’14 EPS of Rs43.9).
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Lower sales growth: EPL reported 7%YoY decline in revenues from Rs3.46bn to Rs3.23bn in Q4FY13. The domestic business revenues (71% of total) declined by 6%YoY from Rs2.45bn to Rs2.31bn. Pharma growth was much lower than the industry growth of ~11%. Its NeutraHealth & Biomeda business (29% of revenues) declined by 9%YoY from Rs1.01bn to Rs927mn.
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Margin under pressure: EPL’s EBIDTA margin for Q4FY13 dropped by 210bps from 14.6% to 12.5% of total revenues due to the increase in material cost and personnel expenses. Its material cost jumped sharply by 990bps from 49.8% to 59.7% of net sales due to the change in product mix. Personnel cost increased by 130bps from 13.6% to 14.9% due to an increase in manpower and annual increments. Other expenses declined by 930bps from 22.1% to 12.8% due to rationalisation measures.

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Major products had slow growth: As per IMS MAT-March’13 data, EPL grew by 8.8% against the industry growth of 10.1%. Out of three major brands, only one brand, Chymoral grew at 15.2%, higher than the industry growth rate. EPL’s top three brands contributed 35% to the company revenues. We expect Chymoral to drive future growth.
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No major impact from new pricing policy: EPL is unlikely to get impacted by the National Pharmaceutical Pricing Policy (NPPP) as two of its brands, Shelcal and Chymoral (total revenues Rs2.32bn), which are outside price control will continue to remain outside. Eldervit which is currently under price control will continue to remain there. Hence, there will not be any adverse impact on the company.
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JV with Kose, Japan: EPL has set up a 60:40 JV with Kose, Japan for the manufacture and marketing of Kose’s cosmetics in India. We expect this business to drive future growth as Kose is a leading global player in cosmetics.
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Valuations: We expect EPL to report revenue growth of 10% and 12% for FY14 and FY15 respectively. At the CMP of Rs318, the stock trades at 8.2x FY14E EPS of Rs38.8 and 6.5x FY15E EPS of Rs48.9. We have revised our FY14 and FY15 estimates downwards by 36% and 37% respectively. We have changed the rating from Buy to Neutral for the scrip with a revised target price of Rs307 (based on 7x Dec’14 EPS of Rs43.85) with a downside of 3.5% from the CMP.