Sequent Scientific. Institutional Equities. 1QFY19 Result Update BUY
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- Berenice Wiggins
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1 1QFY19 Result Update Sequent Scientific 13 August 2018 Reuters: SEQU.BO; Bloomberg: SEQ IN Regulatory Changes And Adverse Forex Movement Dampens Momentum Sequent Scientific or SSL s revenues at Rs2,369mn in 1QFY19 were in line with our estimate. EBITDA at Rs250mn was up 70% YoY and down 19% QoQ as regulatory changes in Turkey impacted performance. Turkey, which is the single largest geography for SSL s formulations business, witnessed an adverse impact of new regulations to ensure judicious use of antimicrobials. This led to a decline in primary sales. SSL is the third-largest player in Turkey with a 10% market share, and on QoQ basis the sales declined almost 40% from Rs 400mn to Rs 243mn. The company expects sales in Turkey to be back to normal by the end of FY19. Animal API business, which accounts for about 25% of its sales, reported strong growth (4% QoQ and 12.3% YoY). Emerging market business also clocked 20% growth QoQ and management expects a break even for the business by YE FY19. Net earnings after minority interest were flat QoQ, despite a decline in EBITDA, as minority interest reduced in proportion as majority owned business s delivered robust growth (especially API and Emerging market formulation business) Earnings highlights: Revenues: They stood at Rs2,369mn, flat QoQ and up 19.7% YoY. Bremer, which was acquired by SSL recently, was also integrated during the quarter, but the impact on its performance was negligible. Overall revenues were in line with our estimate. On QoQ basis, API business grew 4%, but the formulations business was flat. Expenses: Gross margin was flat QoQ. Staff costs were up 15% QoQ because of the dual impact of annual wage hike and integration of Bermer with SSL. EBITDA: At Rs250mn, it was down19% QoQ as regulatory changes in Turkey and forex impact knocked of Rs100mn but was partially offset by the benefit of operating leverage (on account of improving scale in other geographies). Excluding the adverse impact of forex and Turkish regulations (which will reverse), adjusted EBITDA stood at Rs350mn. Net earnings from continuing operations after minority interest stood at Rs32mn, as against Rs 22mn in the same quarter last year. On QoQ basis, net earnings after minority interest were flat. The minority interest was at a lower proportion of net earnings during the quarter as Turkey business underperformed. Outlook and valuation: In the rest of FY19, the formulations business should continue to grow driven by volume growth in existing products, new product launches and geographic expansion, while the API business should also benefit from better pricing driven by foray into the US market and an overall favourable pricing environment. A larger proportion of current earnings can be attributed to minority interest, and this should come down as the API business strengthens and the formulations business across geographies gains critical mass. We have a buy on SSL with a price target of Rs85 which is based on 16.5x FY20E EBITDA, at a 20% premium to median EV/EBITDA multiple of peer group companies. NBIE Values your patronage- Vote for The Team in the Asia Money poll Click Here BUY Sector: Pharmaceuticals CMP: Rs49 Target Price: Rs85 Upside: 75% Vishal Manchanda Research Analyst vishal.manchanda@nirmalbang.com Madhurima Kane Research Associate madhurima.kane@nirmalbang.com Key Data Current Shares O/S (mn) Mkt Cap (Rsbn/US$mn) 11.9/ Wk H / L (Rs) 126/44 Daily Vol. (3M NSE Avg.) 396,944 Price Performance (%) 1 M 6 M 1 Yr Sequent Scientific (5.7) (31.0) (53.6) Nifty Index Source: Bloomberg (Rsmn) Q1FY18 Q4FY18 Q1FY19 YoY (%) QoQ (%) FY17 FY18 YoY (%) Revenues from operations 2,565 2,328 2,352 (8.3) 1.0 6,890 8, Total material costs 1,313 1,235 1,265 (3.6) 2.5 3,567 4, % of revenues bps 75 bps bps Staff costs ,062 1, % of revenues bps 251 bps (202bps Other expenses (15.3) 1.8 1,831 1, % of revenues (178) bps 16 bps (420bps )EBITDA (28.9) (25.6) EBITDA margin (%) (277) bps (342) bps bps Other income (51.4) (37.8) Interest costs (19.3) (19.6) Depreciation (36.0) Exceptional Items - (15) PBT (35) (45) (144) 237 (264.5) Tax (40) (5) Tax rate (%) bps 257 bps ,317bps PAT continuing operation (49) - (139) 102 (173.7) PAT discontinuing operation (65) 3, (25) 4,206 - MI (67) (77) (26) 93 (461.5) Reported PAT post MI (14) 3, (329) - (138) 4,216 - Source: Company, Nirmal Bang Research
2 Earnings conference-call summary Turkey regulatory changes: Revenues from Turkey declined as forex and new regulations related to judicious use of antibiotics were introduced. New regulations basically have tightened vigilance around anti-microbial use through introduction of E-prescriptions and veterinary pharmaceutical product tracking. These regulations led to lower primary sales, but the company expects that it should return to its 4QFY18 quarterly run-rate by 2H-FY19. On YoY basis, revenues from Turkey were flat, but excluding the impact of forex movement, revenues were up 16%. API business on a firm footing: API business grew 4% QoQ and is being driven by a changing customer mix after the approval of manufacturing facilities by the USFDA. SSL is the only animal heath player in India to have an USFDA-approved facility and potentially has the largest number of UVMF filings in the US (among all generic animal health players globally). The disruption in supplies from China has further strengthened its competitive positioning in the industry. Bremer acquisition gets integrated: Bremer acquisition was integrated during the quarter which is primarily into the manufacture of betalactam/non-betalactam injectables. We believe this is an important acquisition strategically as it will bring into play the capabilities of SSL s promoters on the injectables side which can be leveraged for building a larger business out of it. Injectable products that are currently under development at its Barcelona facility can be developed/commercialised through this facility. Emerging market business: It clocked 20% growth QoQ and is expected to break even by 4QFY19. Exhibit 1: Financial summary Net sales 6,062 6,836 8,479 10,278 12,335 EBITDA ,143 1,552 *Adjusted net profit (200) (113) Adjusted EPS (Rs) (0.8) (0.5) Adjusted EPS growth (%) , EBITDA margin (%) P/E (x) P/BV (x) EV/EBITDA (x) RoCE (%) RoE (%) (3.1) (1.4) *Net profit from continued operations after minority interest Source: Company, Nirmal Bang Research Exhibit 2: Revenue summary Particulars 1QFY18 1QFY19 YoY (%) FY17 FY18 YoY (%) API ,965 2, Formulations 1,422 1, ,924 6, Europe ,208 3, Turkey , Emerging markets ,283 1,163 (9.4) LATAM Total 1,942 2, ,889 8, Source: Company, Nirmal Bang Research Exhibit 3: Actual performance versus our estimates 1QFY19 (Rsmn) Actual Our estimate Deviation (%) Revenues 2,352 2,430 (3.2) EBITDA (28.7) EBITDA margin (%) (343bps) PAT Source: Company, Bloomberg, Nirmal Bang Research 2 Sequent Scientific
3 Exhibit 4: Acquisition history Particulars Provet/Topkim Karizoo Evance N-Vet/Fendigo Lyka Animal Health Bremer Pharma Geography Turkey Spain Brazil Rest of EU India Germany Year of acquisition Presence Facilities Presence in Turkey & neighbouring markets EU GMP certified with injectables Presence in key EU countries & Mexico EU approved with antibiotic & nutritional products Presence in Europe, MENA region, Russia and Africa EU GMP certified with injectables Registered products Ownership 60% 60% 70% 85% 100% 100% Provet: 7.7x EBITDA 0.34x revenues Valuation 8x EBITDA Distress buyout 4.5x EBITDA - (loss-making Topkim: 4.0x EBITDA company) Provet: TRY24.6mn Euro24.2mn BRL14.2mn N-Vet: SEK 28.6mn - US$8.3mn Revenues FY17 (nine months from (nine months from Topkim: TRY21.5mn acquisition) acquisition) Fendigo: Euro7.2mn - - Source: Company, Nirmal Bang Research 3 Sequent Scientific
4 Financial statements : Exhibit 5: Income statement Net sales 6,062 6,836 8,479 10,278 12,335 Growth (%) COGS 2,998 3,567 4,625 5,499 6,642 Employee expenses 867 1,062 1,138 1,387 1,561 Other expenses 1,645 1,777 1,885 2,249 2,579 Total expenditure 5,510 6,406 7,649 9,135 10,783 EBITDA ,143 1,552 Growth (%) (22.2) EBITDA margin (%) Other income Interest costs Depreciation Exceptional Items PBT (154) (144) ,012 Tax 26 (5) Effective tax rate (%) (16.7) PAT (200) (113) Growth (%) , Adjusted EPS (Rs) (0.8) (0.5) EPS growth , Source: Company, Nirmal Bang Research Exhibit 7: Balance sheet Equity Reserves 8,981 9,280 5,988 6,471 7,281 Net worth 9,457 9,768 6,476 6,959 7,768 Minority Interest Short-term loans 560 1,947 1,524 1,834 2,206 Long-term loans 2,113 1,651 1,035 1,035 1,035 Total loans 2,674 3,598 2,560 2,869 3,242 Deferred tax liabilities Other non-current liabilities ,129 1,353 1,609 Liabilities directly associated with assets classified as held for sale - 1, Total liabilities 12,937 15,540 10,642 11,852 13,614 Fixed assets including CWIP 4,293 4,011 2,269 2,169 2,069 Intangible assets 1,807 3,158 2,671 2,445 2,265 Non-current investments 3,606 3,640 2,217 2,217 2,217 Other non-current assets ,079 1,295 Current investments Inventories 1,351 1,608 1,586 1,885 2,277 Debtors 1,924 2,546 2,583 3,132 3,758 Cash and cash equivalents ,338 2,702 Other current assets Total current assets 4,761 5,944 5,380 7,275 9,779 Creditors 1,439 2,030 1,605 1,908 2,305 Other current liabilities/provisions 904 1,476 1,180 1,425 1,706 Total current liabilities 2,343 3,506 2,785 3,334 4,011 Net current assets 2,418 2,438 2,595 3,942 5,768 Assets classified as held for sale 144 1, Total assets 12,937 15,540 10,642 11,852 13,614 Source: Company, Nirmal Bang Research Exhibit 4: Exhibit 6: Cash flow PBT (138) (168) ,012 (Inc.)/dec. in working capital (715) (1,044) (207) (405) (462) Cash flow from operations (852) (1,212) Other income (125) (78) (166) (201) (241) Other expenses Depreciation Tax paid 14 (93) (135) (121) (202) Net cash from operations (1) (72) Capital expenditure (655) (787) 1,815 (84) (140) Net cash after capex (656) (860) 2, Other investing activities (2,503) (374) 2, Cash from financial activities 3,141 1,474 (5,356) Opening cash balance ,338 Closing cash balance ,338 2,702 Change in cash balance (18) 240 (45) 942 1,364 Source: Company, Nirmal Bang Research Exhibit 5: Exhibit 8: Key ratios Per share (Rs) EPS (0.8) (0.5) BPS Profitability & return ratios (%) EBITDA margin EBIT margin PAT margin (3.0) (2.0) RoCE RoE (3.3) (1.2) Working capital & liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio(x) Quick ratio(x) Valuation ratios (x) P/E P/BV EV/EBITDA EV/sales Source: Company, Nirmal Bang Research 4 Sequent Scientific
5 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jul-18 Aug-18 Rating track Date Rating Market price (Rs) Target price (Rs) 13 March 2018 Buy April 2018 Buy May 2018 Buy Rating track graph Not Covered Covered 5 Sequent Scientific
6 DISCLOSURES This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as NBEPL ) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments. NBEPL has other business divisions with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. NBEPL or its associates have not been debarred / suspended by SEBI or any other regulatory authority for accessing / dealing in securities Market. NBEPL, its associates or analyst or his relatives do not hold any financial interest in the subject company. NBEPL or its associates or Analyst do not have any conflict or material conflict of interest at the time of publication of the research report with the subject company. NBEPL or its associates or Analyst or his relatives do not hold beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of this research report. NBEPL or its associates / analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. NBEPL or its associates have not received any compensation or other benefits from the company covered by Analyst or third party in connection with the research report. Analyst has not served as an officer, director or employee of Subject Company and NBEPL / analyst has not been engaged in market making activity of the subject company. Analyst Certification: I/We, Mr. Vishal Manchanda, the research analysts and Madhurima Kane, the research associate are the author of this report, hereby certify that the views expressed in this research report accurately reflects my/our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. 6 Sequent Scientific
7 Disclaimer Stock Ratings Absolute Returns BUY > 15% ACCUMULATE -5% to15% SELL < -5% This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. NBEPL is not soliciting any action based upon it. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such transaction. In preparing this research, we did not take into account the investment objectives, financial situation and particular needs of the reader. This research has been prepared for the general use of the clients of NBEPL and must not be copied, either in whole or in part, or distributed or redistributed to any other person in any form. If you are not the intended recipient you must not use or disclose the information in this research in any way. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. NBEPL will not treat recipients as customers by virtue of their receiving this report. This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject NBEPL & its group companies to registration or licensing requirements within such jurisdictions. The report is based on the information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up-to-date and it should not be relied upon as such. We accept no obligation to correct or update the information or opinions in it. NBEPL or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. NBEPL or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This information is subject to change without any prior notice. NBEPL reserves its absolute discretion and right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, NBEPL is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. Before making an investment decision on the basis of this research, the reader needs to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. Opinions expressed are subject to change without any notice. Neither the company nor the director or the employees of NBEPL accept any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Here it may be noted that neither NBEPL, nor its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profit that may arise from or in connection with the use of the information contained in this report. Copyright of this document vests exclusively with NBEPL. Our reports are also available on our website Access all our reports on Bloomberg, Thomson Reuters and Factset. Team Details: Name Id Direct Line Rahul Arora CEO rahul.arora@nirmalbang.com - Girish Pai Head of Research girish.pai@nirmalbang.com / 18 Dealing Ravi Jagtiani Dealing Desk ravi.jagtiani@nirmalbang.com , Pradeep Kasat Dealing Desk pradeep.kasat@nirmalbang.com /8101, Michael Pillai Dealing Desk michael.pillai@nirmalbang.com /8103, Nirmal Bang Equities Pvt. Ltd. Correspondence Address B-2, 301/302, Marathon Innova, Nr. Peninsula Corporate Park, Lower Parel (W), Mumbai Board No. : /1; Fax. : Sequent Scientific
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Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 2904 Recommendation CMP Target Price BUY Rs. 312 Rs. 443 Better times ahead! reported a good set of numbers in
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3QFY18 Result Update Institutional Equities Manappuram Finance 9 February 2018 Reuters: MNFL.BO; Bloomberg: MGFL IN The Glitter Is Back In Gold Loans Manappuram Finance (MFL) reported its 3QFY18 results
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3QFY15 Result Update Institutional Equities Bajaj Electricals 13 February 2015 Reuters: BJEL.BO; Bloomberg: BJE IN Final Phase Of Transition Pain; Retain Buy Bajaj Electricals (BJE) posted 3QFY15 revenue
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4QFY16 Result Update Institutional Equities Timken India 23 May 2016 Reuters: TMKN.BO; Bloomberg: TIMK IN Margin Expansion Leads To Huge Growth In Profit; Retain Buy Timken India (TIL), the leading manufacturer
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Result Update The India Cements 12 November 218 Reuters: ICMN.BO; Bloomberg: ICEM IN Lackluster Performance The India Cements (ICEM) reported a listless operating performance in because of the sustained
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3QFY15 Result Update Institutional Equities Cadila Healthcare 11 February 2015 Reuters: CADI.BO; Bloomberg: CDH IN Stable Performance Cadila Healthcare s (CHL) 3QFY15 earnings were in line with our expectations
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2QFY18 Result Update Institutional Equities CARE Ratings 17 November 217 Reuters: CREI.BO; Bloomberg: CARE IN Mixed Performance CARE Ratings (CARE) reported an increase of 12.3% in revenues for 2QFY18
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3QFY15 Result Update Institutional Equities GlaxoSmithKline Consumer Healthcare Reuters: GLSM.BO; Bloomberg: SKB IN 4 February 2015 Price Hike Leads To Sales Growth Glaxo SmithKline Consumer Healthcare
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2904 Recommendation CMP Target Price BUY Rs. 283 Rs. 444 Better times ahead! reported a good set of numbers for the year FY18 and for Q4. Sales for the quarter increase by 11.8% YoY to Rs 1809.8 Cr and
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Result Update Institutional Equities Dalmia Bharat Enterprises Reuters: DALA.BO; Bloomberg: DBEL IN 14 August 218 Listless Performance, But Valuation Premium Continues Dalmia Bharat Enterprises (DBEL)
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4QFY17 Result Update Institutional Equities Capital First 11 May 2017 Reuters: CAPF.BO; Bloomberg: CAFL IN Net Interest Income Up, But Offset By Elevated Credit Costs Although the net interest income or
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Event Update Institutional Equities ACC 19 December 218 Reuters: ACC.BO; Bloomberg: ACC IN Capacity Expansion To Consolidate Presence In Central India ACC has announced 5.9mt capacity expansion by adding
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Management Meet Update Institutional Equities Swiss Glascoat Equipments 28 December 17 Reuters: SWGE.BO; Bloomberg: SWGE IN We had a meeting with the management of Swiss Glascoat Equipments (SGEL) recently
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Event Update The Ramco Cements 21 December 2018 Reuters: TRCE.BO; Bloomberg: TRCL IN Capacity Expansion To Boost Its Presence In Andhra & Telangana The Ramco Cements (TRCL) has announced 3.15mt cement
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Management Meet Update Atul Auto 23 August 2017 Reuters: ATUL.BO; Bloomberg: ATUL IN We had a meeting with the management of Atul Auto (AAL) recently to gauge its performance in the aftermath of a relatively
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1QFY18 Result Update Institutional Equities HDFC Bank Reuters: HDBK.BO; Bloomberg: HDFCB IN Higher Fee Income Offsets Higher Provisioning HDFC Bank s net interest income or NII grew 20% in 1QFY18 driven
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Economy Update Institutional Equities May Inflation/April Index of Industrial Production 13 June 2018 CPI Inflation At 4.9%; IIP Growth Also At 4.9% Consumer Price Index or CPI inflation in India stood
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3QFY18 Result Update Institutional Equities Federal Bank 16 January 2018 Reuters: FED.BO; Bloomberg: FB IN Quarter Typifies Balanced Growth Engine Federal Bank (FBL) reported 3QFY18 results with the key
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1QFY18 Result Update Institutional Equities Muthoot Finance 10 August 2017 Reuters: MUTT.BO; Bloomberg: MUTH IN Gold Loan Business Continues To Glitter Strong profitability numbers of Muthoot Finance (MFL)
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2QFY18 Result Update Institutional Equities Muthoot Finance 10 November 2017 Reuters: MUTT.BO; Bloomberg: MUTH IN Gold Loan Business Really Glitters Strong profitability numbers of Muthoot Finance (MFL)
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4QFY17 Result Update La Opala RG 11 May 217 Reuters: LAOP.BO; Bloomberg: LOG IN Revenues Soar, But Margins Take A Hit La Opala RG (LORL) reported revenues of Rs761mn for 4QFY17, up 41% YoY. The stellar
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1QFY19 Result Update Institutional Equities South Indian Bank 23 July 2018 Reuters: SIBK.BO; Bloomberg: SIB IN Performance Troughs, Pessimism Peaks South Indian Bank (SBL) reported 1QFY19 results with
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