Elder Pharma - Sustainable growth - Centrum

Elder Pharma's (EPL) results for Q2FY13 were in line with our expectations. The company reported 22%YoY growth in revenues, 140bps decline in EBIDTA margin and 26%YoY growth in net profit. The sales growth of domestic operations was 19%YoY whereas that of overseas subsidiaries was 30%YoY. The merger of Elder Healthcare (EHL) with EPL had no major impact on the overall performance of EPL. We do not expect major negative impact from the new pharma policy on the company. We have a Buy rating for the scrip with a target price of Rs429 (based on 7x FY14E EPS of Rs61.2) with an upside of 43.8%.

- Good sales growth: EPL reported 22%YoY growth in revenues from Rs3.32bn to Rs4.05bn. The domestic business (75% revenues) grew by 19%YoY from Rs2.53bn to Rs3.02bn. The overseas subsidiaries NeutraHealth, UK and Biomeda, Bulgaria (25% of revenues) collectively reported 30%YoY growth from Rs784mn to Rs1,022mn.

- Margin under pressure: EPL's EBIDTA margin declined by 140bpsYoY from 16.6% to 15.2% due to the sharp rise in the material cost. Material cost grew by 360bps from 50.0% to 53.6% of revenues due to the rise in imported raw material cost with rupee depreciation. Personnel cost declined by 80bps YoY from 14.1% to 13.3% due to strong sales growth. Other expenses declined by 140bps from 19.3% to 17.9%.

- Leading brands growing well: EPL's three major brands are growing faster than the market. As per IMS MAT-August'12 data, the company reported lower growth of 10.3% against the industry growth of 12.4%. EPL's three major brands grew as follows: Shelcal 13.8%, Chymoral 21.1% and Shelcal-CT 14.8%. These flagship brands contributed ~36% to the domestic revenues and are likely to drive future growth.

- No major threat from new drug policy: EPL has three major products in the top 300 list. Its major brand Chymoral is outside DPCO and will continue to remain outside price control under NPPP. EPL's flagship brand Shelcal is currently outside DPCO and will also be outside price control as it is a combination brand.

- Valuations: We expect EPL to benefit from good growth in the domestic market from existing products and the introduction of new products. Overseas subsidiaries are expected to report better performance and break even in FY14. At the CMP of Rs298, the stock trades at 6.5x FY13E EPS of Rs45.9 and 4.9x FY14E EPS of Rs61.2. We have a Buy rating for the scrip with a target price of Rs429 (based on 7x FY14E EPS of Rs61.2) with an upside of 43.8%.

Source : Equity Bulls

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