FDC - Target Price Revision - Moving to a higher orbit-maintain Buy :Centrum

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Rating: Buy; Target Price: Rs220; CMP: Rs174; Upside: 26.4%



Moving to a higher orbit-maintain Buy



We maintain Buy rating for FDC with a target price of Rs220 (earlier
Rs200) based on 17xJune’17 EPS of Rs12.8. FDC’s revenues and EBIDTA
margin for Q1FY16 were better than our expectations and net profit was
in-line with our expectations. It reported 19%YoY growth in revenues,
320bps improvement in EBIDTA margin to 23.0% and 27% growth in net
profit.  For June’15, FDC’s flagship brand Vitocofol and Zocon
reported 21% and 56% growth respectively. The introduction of tetra
packs for Electral and Punarjal is likely to improve the margins. The
company added 400 MRs during the year to give a marketing thrust to
its brands. Key risks to our assumptions include lower growth of its
major brands and regulatory risks for its various manufacturing
facilities.

$ Sales grew 19%YoY: FDC’s revenues for Q1FY16 grew by 19%YoY to
Rs2.61bn from Rs2.18bn. As per IMS MAT data-June’15, FDC grew at 10.3%
against the industry growth rate of 15.6%. The company’s five major
brands appear in the list of top 500 brands. These brands contributed
39% to revenues indicating high dependence on them. Vitcofol grew by
21% and Zocon by 56%YoY and collectively contributed 7.4% to the
revenues. These brands are likely to become future growth drivers. The
company has launched Electral and Enerzal in ready-to-drink tetra
packs in the domestic market. We expect these tetra packs to drive
future growth as they have higher margins than the pouch and are
ready-to-drink.

$ Margin improved by 320bps YoY: FDC’s EBIDTA margin improved by
320bps to 23.0% from 19.8% due to the overall reduction in the cost.
Material cost declined by 170bpsYoY to 38.1% from 39.8% due to
favourable product mix. Personnel expenses declined by 30bps to 15.9%
from 16.2% due strong revenue growth. Other expenses declined by
110bps to 23.1% from 24.2%. We expect margin improvement to come from
new product launches, price increases of up to 10% for non-NLEM
products and 3.8% for NLEM products in April’15 and volume growth.

$ Net profit grows by 27%: FDC’s net profit grew by 27%YoY to Rs437mn
from Rs343mn due to strong revenue growth and margin improvement. The
company’s other income declined by 24%YoY to Rs117mn from Rs154mn. Its
depreciation declined by 20%YoY to Rs85mn from Rs106mn due to the
revision of depreciation rates based on the useful life of the asset.
The company’s tax rate increased to 30.2% from 27.6% of PBT. Going
further, we expect higher net profit due to price increases and volume
growth.

$ Valuation & key risks: We have maintained our FY16E and FY17 EPS
estimates. We expect FDC to report good performance in the domestic
market due to its strong brand and marketing thrust.  We have revised
the target multiple to 17x from 16x in view of good performance and
re-rating of the pharma sector. We maintain Buy rating on the scrip
with a target price of Rs220 based on 17x June’17E EPS of Rs12.8 with
an upside of 26.4% from CMP. Key risks to our assumptions are lower
growth of its major brands and regulatory risks for its various
manufacturing facilities.



Thanks & Regards

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