Wyeth - Downgrade to Hold on multiple headwinds - Centrum

We have changed Wyeth's rating from Buy to Hold due to disappointing results for Q1FY14. Wyeth's revenues, EBIDTA margin and net profit were below our expectations. The company reported a decline of 1%YoY in revenues, 1,410bps in EBIDTA margin and 43%YoY in net profit. As per AIOCD data, all four major brands reported negative growth. Wyeth will get impacted by the New Pharma Pricing Policy (NPPP) as two major brands Folvite and Ovral-L will face a price fall of 52% and 27% respectively. The company has cash per share of Rs194. We have revised our EPS estimates downward for FY14 and FY15 by 41% and 40% respectively. We have revised the target price to Rs697 from Rs1,224 (based on 13x FY15 EPS of Rs53.6).

Flat Revenue growth: Wyeth reported 1%YoY decline in revenues from Rs1.68bn to Rs1.67bn in Q1FY14. The company's pharma business (94% of revenues) was flat at Rs1.57bn. Its other business (6% of revenues) declined by 12%YoY from Rs113mn to Rs100mn. The other business constitutes two OTC brands, Anacin and Anne French hair remover. Both are facing stiff competition in the domestic market.

Sharp fall in margin: Wyeth's margin for Q1FY14 fell sharply by 1,410bps from 29.3% to 15.2% due to overall increase in expenses. Its material cost increased by 340bps from 38.2% to 41.6% of revenues due to an increase in imported material cost with the depreciation of the rupee. Personnel cost grew by 110bps from 6.1% to 7.2% due to annual increments given and onetime cost of Rs10mn. Other expenses increased by 960bps from 26.4% to 36.0% of revenues. Other expenses included Rs60mn forex loss, Rs39mn extra sales promotion expenses and Rs36mn payment to Pfizer for Prevenar 13 promotion for adult use. Excluding these expenses, EBIDTA margin would be 23.9 %.

Major risks and upsides: Wyeth will get impacted by NPPP as two of its major brands will be under price control. We expect a price fall of 52% for Folvite (annual revenues Rs600mn) and 27% for Ovral-L (revenues Rs445mn). The expected revenue hit would be Rs432mn over FY14 and FY15. Wyeth imports Prevenar 13 (revenues Rs1.6bn) in the finished form and has incurred forex loss of Rs60mn in Q1FY14 due to the same. Any further depreciation of rupee against the dollar would impact the margin further. In case the company regains the revenue loss through increased volumes or if the rupee appreciates, the share price would improve from the current level.

Valuations: We expect Wyeth to report moderate growth after the implementation of NPPP due to its strong brands and expected volume growth for brands that faced the price fall. At the CMP of Rs650, the stock trades at 14.9x FY14E EPS of Rs43.6 and 12.1x FY15E EPS of Rs53.6. We have revised the rating to Hold from Buy with a revised target price of Rs697 (based on 13x FY15 EPS of Rs53.6), an upside of 7.2% over the CMP.

Source : Equity Bulls

Keywords