Morning Briefing for April 02, 2014 – Standard Capital

Karachi, April 02, 2014 (PPI-OT): Pharma companies to benefit from strengthened PKR and focus on Nutrition segment

Pharmaceutical industry has shown 11% growth in term of revenues and posted Rs 34bn as revenue during 1HFY14. But increasing cost is also ‘shrinking’ margin of the industry but IBL Health Care (IBLHL) and Abbott Pakistan (ABOT) have managed to boost its profitability via distribution denominated business model and cost leadership – market penetration strategy respectively.

Strengthen PKR to support import oriented companies’ profitability
Small company IBLHL as well as local giant ABOT seems to have diversified product portfolio and both may benefit from strengthening PKR against green back due to decrease in cost of imported products. During 1HFY14 IBLHL posted 35% gross profit margin wherein ABOT managed its GP margin to 38% during CY13 post. A further swelling in GP margin is expected given lowering cost of imports, which is a good sign for most of the pharmaceutical players.

Diversification- the possible solution available to Pharma players
The price regulatory framework is under tremendous spotlight where government authorities have lose control over fixing the price and resultantly prices of drugs have increased a lot in recent times. Still Pharma sector executives complain about ‘diminishing margin’. Now players looking to diversify into Nutrition and Diagnostics products segment and adding them into the product portfolio mix for better margins.

Given table shows comparison between Pharma and bio tech players. Based on Dec’ 13 results, FEROZ is leading the industry with 52.3% GP margin and 16.5% net profit margin. Alongside KASB Securities Limited expects IBLHL and ABOT to post healthy growth in earnings during this reporting year due to foreign exchange gain. Based on KASB Securities Limited’s assumption IBLHL yield lower expected PE of 11.2x and dividend yield of 2.82% for FY14. Wherein SEARL yields PE of 11.9x and ABOT 13.4x.

Pharma sector seems to beat benchmark PE of KSE100 and addition of relative Nutrition segment seems to align them with food producers PE. KASB Securities Limited sees this aspect in ABOT, SEARL and GLAXO.

Pharma and bio tech Industry

Gross Profit Margin % 35.16 42.48 26.27 52.31 38.46
Net Profit Margin % 18.13 13.25 5.7 16.46 14.69
Last Annual EPS Rs 4.37 8.55 3.67 13.54 25.83
Latest EPS Rs 3.85 (6M) 6.42(6M) 3.67(12M) 6.24 (6M) 25.83(12M)
Exp. Annual EPS Rs 7.9 12.55 5.1 13.5 31.25
Exp.P/E x 11.2 11.9 31.9 14.4 13.4
Book Value Rs 18.16 45.16 38.67 85.37 89.35
Expected Book Value Rs 23.22 55 42.34 97.85 115.18
Exp. PBV x 3.75 2.59 3.62 1.8 3.56
Return On Assets % 20.23 10.31 8.13 15.65 22.64
Dividend Rs 1.5 2.0 3.5 7.0 7.0
Payout Ratio % 34.32 23.39 95.37 51.70 27.10
Expected Dividend Rs 2.5 2.0 4.0 7.0 8.0
Exp. Dividend Yield % 2.82 1.34 2.46 3.60 1.91
Exp. payout Ratio % 31.65 15.94 78.43 51.85 25.60

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