Elder Pharma - Margin under pressure - Centrum

Elder Pharma's (EPL) results for Q3FY13 were below our expectations. The company reported 9%YoY growth in revenues, 60bps decline in EBIDTA margin and 6%YoY decline in net profit. The sales growth of domestic operations declined by 2%YoY whereas that of overseas subsidiaries grew by 43%YoY. We have reduced our EPS estimates for FY13 and FY14 by 8% and 1% respectively. We do not expect major adverse impact on the company from the new pharma policy. We have a Buy rating for the scrip with a revised target price of Rs427 (based on 7x FY14E EPS of Rs60.9) with an upside of 18.2%.

Lower sales growth: EPL reported 9%YoY growth in revenues from Rs3.44bn to Rs3.75bn. The domestic business (67% revenues) declined by 2%YoY from Rs2.57bn to Rs2.51bn. Overseas subsidiaries NeutraHealth, UK and Biomeda, Bulgaria (33% of revenues) collectively reported 43%YoY growth from Rs865mn to Rs1,239mn.

Margin under pressure: EPL's EBIDTA margin declined by 60bpsYoY from 16.0% to 15.4% due to the sharp rise in other expenses. Material cost declined by 590bps from 54.7% to 48.8% of revenues due to the change in product mix with higher overseas revenues. Personnel cost increased by 70bps YoY from 14.4% to 15.1% due to manpower addition. Other expenses grew by 570bps from 15.0% to 20.7%.

Leading brands growing well: EPL's three major brands are growing faster than the market. As per IMS MAT-December'12 data, the company reported a growth of 11.0% in line with the industry growth of 11.1%. EPL's three major brands, Shelcal grew 12.0%, Chymoral 15.7% and Shelcal-CT 12.1%. 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 and Shelcal-CT are currently outside DPCO and will continue to be outside price control as it is a combination brand.

Valuations: We expect EPL to benefit from good growth in the domestic market from its existing products and the introduction of new products. Overseas subsidiaries are expected to report better performance and break even in FY14. We have revised our FY13 and FY14 EPS estimates downwards by 7% and 1% respectively. At the CMP of Rs361, the stock trades at 8.5x FY13E EPS of Rs42.5 and 5.9x FY14E EPS of Rs60.9. We have a Buy rating for the scrip with a revised target price of Rs427 (based on 7x FY14E EPS of Rs60.9) with an upside of 18.2%.

Source : Equity Bulls

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