Rating Revision 17 November 2016

Transcription

1 INDIA HOLD Rating Revision 17 vember 2016 Pharma Regulatory pain continues, downgrade to Hold We downgrade (MPL) to Hold from Buy rating, with a TP of Rs36 (earlier Rs60) based on 18x March 18E EPS of Rs2.0. MPL s Q2FY17 results were below our expectations due to the decline in sales in the UK, Europe and US markets. MPL reported 27%YoY decrease in revenue, 1,660bps decline in EBIDTA margin to 3.5% and 99% drop in net profit. The results were impacted by the restrictive imports in UK imposed by UK MHRA. We expect its performance to improve, as the US market is likely to report good growth led by recent launch of three new products and expected approvals for softgel capsules. Key positive risk to our assumption includes good growth in the US market and key negative risk includes delay in clearance of Goa facility by UK MHRA. We recommend a switch to Granules India or Aurobindo Pharma. Revenue set to grow: MPL revenues declined 27%YoY to Rs1.87bn from Rs2.56bn due to lower growth in the UK, Europe and US markets. MPL s US and N. America business (46% of revenues) declined by 24% YoY to Rs865mn from Rs1,144mn due to label transition to TimeCap Labs. MPL s UK & Europe business (33% of revenues) declined by 45%YoY to Rs612mn from Rs1,101mn due to restriction imposed by UK MHRA on non-critical product imports, lower offtake and pricing pressure. The company s Australia and New Zealand business (15% of revenues) grew by 10% YoY. We expect sales to grow, driven by US and Australia/New Zealand businesses. Margin set to improve: MPL s EBIDTA margin declined by 1,660bps YoY to 3.5% from 20.1% due to the integration of low-margin TCL business and slowdown in the UK and Europe business. The company s material cost grew by 550bps to 58.8% from 53.3% due to the change in product mix and pricing pressure in the UK market. Personnel cost grew by 450bps YoY to 18.8% from 14.3% due to additional 150 employees at TCL. Other expenses grew by 660bps YoY to 18.9% from 12.3% due to Rs61mn expenses for IT initiatives. We expect margins to improve from strong growth in its products in the US and additional ANDA approvals from US FDA. Net profit set to grow: MPL s net profit for the quarter declined by 99%YoY to Rs4mn from Rs349mn due to sharp fall in margin. We expect the company to report sustainable growth, driven by the US and Australia & New Zealand business and commencement of domestic formulation business. Recommendation and key risks: We expect MPL performance to improve with good growth expected in the US market from the recent launch of three products. MPL has received target dates for seven products from US FDA in FY17 and expects additional approvals. We expect the UK MHRA to re-inspect the Goa facility in Q4FY17. We have revised our FY17E and FY18E EPS downwards by 92% and 40% respectively. We downgrade MPL to Hold from Buy rating, with a TP of Rs36 based on 18x March 18 EPS of Rs2.0, and a 17.6% downside from CMP. Particulars (Rs mn) Q2FY17 Q2FY16 YoY Gr% Q1FY17 QoQ Gr % Q2FY17E % Var. Total income 1,871 2,555 (26.8) 1, ,100 (10.9) Total Expenditure 1,806 2,042 (11.5) 1, ,855 (2.6) EBIDTA (87.3) 83 (21.1) 245 (73.3) EBIDTA Margin (%) Other income 0 0 NA 0 NA 0 NA PBDIT (87.3) 83 (21.1) 245 (73.3) PBT (4) 430 (101.0) 22 (119.7) 180 (102.4) Prov. For tax (9) 73 (112.3) 3 (400.0) 45 (120.0) % of PBT PAT before minority interest (98.7) 19 (75.0) 135 (96.5) Minority int./ Sh. of assoc. (1) (8) (91.6) (9) (91.8) (8) (91.3) PAT (98.9) 10 (61.2) 127 (96.9) Target Price Rs36 Key Data CMP* Rs44 Bloomberg Code MRKS IN Downside 17.6% Curr Shares O/S (mn) Previous Target Rs60 Diluted Shares O/S(mn) Previous Rating Buy Mkt Cap (Rsbn/USDmn) 18.0/262.5 Price Performance (%)* 52 Wk H / L (Rs) 113.9/33.5 1M 6M 1Yr 5 Year H / L (Rs) 115/1.3 MRKS IN (18.1) (10.7) (55.1) Daily Vol. (3M NSE Avg.) Nifty (4.5) Source: Bloomberg, Centrum Research, *as on 16 vember 2016 Shareholding pattern* (%) Sept-16 June-16 Mar-16 Dec-15 Promoter FIIs DIIs Others Source: BSE, *as on 16 vember 2016 Trend in EBIDTA margin (%) % Source: Company, Centrum Research Trend in Material cost (%) % Source: Company, Centrum Research Earning Revision Particulars (Rs mn) FY17E FY18E New Old Chg (%) New Old Chg (%) Revenue 8,147 11,123 (26.8) 9,772 13,875 (29.6) EBITDA 443 1,849 (76.0) 1,491 2,380 (37.3) EBITDA Margin (%) (1120)bps (190 )bps PAT (91.5) 824 1,373 (40.0) Source: Centrum Research Estimates Ranjit Kapadia, ranjit. kapadia@centrum.co.in; Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Y/E Mar (Rsmn) Revenue YoY (%) EBITDA EBITDA (%) Adjust. PAT YoY (%) DEPS Rs. RoE (%) RoCE (%) P/E (x) EV/EBITDA (x) FY14 6, , FY15 7, , , FY16 9, , (28.2) FY17E 8147 (9.7) (89.2) FY18E 9, , Source: Company, Centrum Research Estimate In the interest of timeliness, this document is not edited. Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet

2 Sales composition MPL s Q2FY17 sales composition was as follows: MPL reported 27%YoY decline in revenues to Rs1.87bn from Rs2.56bn due to sharp drop in UK, Europe and US revenues. MPL s UK, Europe revenues (33% of sales) declined by 45% YoY to Rs612mn from Rs1,101mn due to the restrictive imports imposed by UK MHRA and currency impact from Brexit. Moreover, Relonchem products faced pricing pressure due to competition and consolidation of channels. The company s RoW revenues (6% of sales) grew by 114% YoY to Rs108mn from Rs50mn. The US business underwent a transition from distributors to TCL which is now complete. The US business (46% of sales) declined by 24% YoY to Rs865mn from Rs1,144mn due to label transition. The company s Australia & New Zealand business (15% of revenues) grew by 10% YoY to Rs287mn from Rs260mn. We expect the US and UK, Europe businesses to drive future growth. Exhibit 1: Geography-wise revenues (consolidated) PARTICULARS (Rs mn) Q2FY17 Q2FY16 YoY Gr% Q1FY17 QoQ Gr % Q2FY17E % Var. Europe, UK-formulations (44.5) 761 (19.6) 790 (22.6) US, N.America-formulations (24.3) (7.0) Australia, NZ-formulations (10.3) RoW formulations Other op. income 0 0 NA 0 NA 0 NA Total Revenues ,555 (26.8) 1, ,100 (10.9) Source: Company Other developments US business-likely to improve MPL s US business (46% of sales) has witnessed short-term slowdown in the sales of existing products due to shift of marketing to TimeCap Labs. The label transition is in progress. The company is currently marketing 12 approved products in the US and awaiting further approval from the eight pending ANDA with US FDA. MPL has received approval from US FDA for the following products: Metformin HCl ER tablets 500 and 750mg, Paricalcitol tablets 1, 2 and 4 mcg and Loratidine softgel capsules 10mg. These products have already been despatched from India. Paricalcitol tablets have limited competition whereas Loratidine softgel has no competition from other generic players. There is no price erosion for MPL products in the US due to the limited competition. MPL do not face regulatory issue from US FDA for its Goa facility. UK, Europe business-impacted by restrictive imports The company s UK & Europe business (33% of sales) declined by 45%YoY due to higher competition, price erosion, channel consolidation and moderation in offtake. The business lost witnessed 5-6% revenue loss due to the weakening of pound after Brexit. There was no new approval for UK & Europe business. During Q2FY17, sales were impacted by restrictive import of critical products in the UK by UK MHRA. The remedial measures for the same are ongoing. The UK MHRA is likely to re-inspect the Goa facility in Q4FY17. Australia, NZ-business as usual MPL s Australia, NZ business (15% of sales) grew by 10%YoY to Rs287mn from Rs260mn. The Goa facility was recently inspected by TGA-Australia without any observations in Form 483 and expects certification in Q3FY17. 2

3 Entry into domestic market MPL has entered into domestic branded generic market with over 40 brands in dermatology, respiratory and CNS segments. The company plan to recruit MRs. MPL has incorporated IT applications in Quality, Manufacturing and R&D functions with laboratory automation, instrument integration and manufacturing execution and spent ~Rs61mn on the same in Q2FY17. This has also resulted in temporary slowdown of the operations. TCL has established new R&D centre at Nerul for formulation development and NDDS for regulated markets and has recruited 15 scientists. The R&D centre would be functional from December 16 and is expected to have 50 scientists by FY18. The company generates over 95% of its revenues from the regulated markets of the US, EU, Australia/NZ and Canada. The performance of Q2FY17 was impacted by restrictive imports to UK imposed by UK MHRA. The company does not face any regulatory issue from US FDA for its goa facility. Earnings revision Based on disappointing Q2FY17 results, we have lowered our FY17E and FY18E EPS estimates by 92% and 40%, respectively, in view of regulatory issues with UK MHRA. However, the company s Goa facility is compliant with US FDA and exports to US are in place. We expect MPL s performance to improve, with good growth expected in the US market from the recent launch of three products in the US and pending approvals for softgel capsules. MPL has received target dates for seven products from US FDA in FY17 and expects 2-3 additional approvals. We expect re-inspection of Goa facility by UK MHRA in Q4FY17. We downgrade MPL to Hold from Buy rating, with a TP of Rs36 based on 18x March 18 EPS of Rs2.0, and a 17.6% downside from CMP. Exhibit 2: Earnings revision Particulars FY17E FY18E Current Earlier Chg(%) Current Earlier Chg(%) Sales 8,147 11,123 (26.8) 9,772 13,875 (29.6) EBIDTA 443 1,849 (76.0) 1,491 2,380 (37.3) EBIDTA margin (%) (1120 )bps (190 )bps Net profit (91.5) 824 1,373 (40.0) Source: Centrum Research Estimates 3

4 Valuation and recommendation Exhibit 3: Sensitivity Analysis Sensitivity to key variables FY17E % change % impact on EBITDA % impact on EPS Sales Material cost 1 (10.6) (55.3) Exhibit 4: 1 year forward EV/EBITDA chart Exhibit 5: 1 year forward P/E chart v-12 Mar-13 Jul-13 v-13 Mar-14 EV/EBITDA Mean + Std Dev Jul-14 v-14 Mar-15 Jul-15 v-15 Mean Mar-16 Mean - Std Dev Jul-16 v (40) v-12 Mar-13 Jul-13 v-13 Mar-14 Jul-14 P/E Mean + Std Dev v-14 Mar-15 Jul-15 v-15 Mar-16 Jul-16 Mean Mean - Std Dev v-16 Source: Bloomberg, Company, Centrum Research Estimates Source: Bloomberg, Company, Centrum Research Estimates Exhibit 6: Comparative Valuations Company Mkt Cap (Rs mn) CAGR FY16-FY18E (%) EBITDA Margin (%) PE (x) EV/EBITDA (x) RoE (%) Div Yield (%) Rev. EBITDA PAT FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E 18, Granules India 22, Indoco Remedies* Strides Shasun* 91, , *Bloomberg Estimates Prices as on 17 th vember

5 Quarterly financials, Operating Metrics and Key Performance Indicators Exhibit 7: Quarterly Financials Particulars (Rs mn) Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Total Sales 2,133 1,738 2,125 2,555 2,175 2,167 1,868 1,871 Materials Cost 1, ,175 1,363 1,111 1,448 1,098 1,101 Personnel expenses Other expenses Total Expenditure 1,608 1,319 1,601 2,042 1,869 2,059 1,785 1,806 EBIDTA Other income PBDIT Depreciation Interest PBT Tax PAT before minority Share of profit of associates PAT after minority Growth Rates % Sales (12.1) (26.8) EBIDTA (41.7) (74.3) (84.2) (87.3) Net profit (35.3) (123.0) (96.7) (98.9) Margin % EBIDTA margin PBT margin (0.2) Net margin Source: Company, Centrum Research Exhibit 8: Key performance indicators Key performance indicator FY14 FY15 FY16 FY17E FY18E Sales gr. Rate% (9.7) 20.0 Material cost %

6 Financials -consolidated Exhibit 9: Income Statement Y/E March FY14 FY15 FY16 FY17E FY18E Net Sales 6,300 7,967 9,022 8,147 9,772 -Growth (%) (9.7) 20.0 Operating Expenses 5,123 6,120 7,570 7,704 8,281 % of sales Material cost % of sales Personnel cost % of sales Other Expenses * of sales EBIDTA 1,177 1,847 1, ,491 -EBIDTA margin (%) Depreciation EBIT 1,021 1,686 1, ,244 Interest Income/(expenses) (191) (161) (102) (50) (10) PBT from operations 829 1,525 1, ,234 Other non operating income PBT 864 1,559 1, ,234 -PBT margin (%) Provision for tax Effective tax rate (%) Share of profit of associates (17) (26) (42) (20) (25) Net profit 719 1, Exhibit 10: Key Ratios Y/E March FY14 FY15 FY16 FY17E FY18E Growth Matrices (%) Net sales (10.0) 20.1 EBIDTA (21.4) (69.5) Adjusted PAT (28.2) (89.2) Profitability Matrices (%) EBIDTA margin EBIT margin PAT margin Return ratios (%) ROE ROCE ROIC Turnover Ratios (days) Inventory Debtors Creditors Solvency Ratio (X) Debt-equity Net Debt -equity 0.6 (0.3) 0.1 (0.2) 0.2 Liquidity ratio Interest coverage Dividend DPS Rs Dividend Yield (%) Dividend Payout (%) Per share (Rs) Basic EPS (reported) FDEPS (reported) FDEPS(adjusted) BVPS CEPS Valuation metrices (x) P/E P/BV EV/EBIDTA EV/Sales Exhibit 11: Balance Sheet Y/E March FY14 FY15 FY16 FY17E FY18E Share capital Preference shares Share warrants Reserves & surplus 903 3,274 4,009 4,001 4,754 Total shareholder's fund 1,423 3,808 4,544 4,536 5,163 Loan fund 1, ,100 Deferred tax liability (19) (20) (22) Minority interest Total capital employed 2,766 4,726 5,488 5,556 6,341 Gross block 2,617 2,978 4,241 4,676 5,062 Accumulated depreciation (1,161) (1,319) (1,544) (1,730) (1,932) Net Block 1,457 1,659 2,697 2,946 3,130 Net fixed assets 1,457 1,659 2,697 2,946 3,130 Cash and bank 470 1, , Inventories 1,026 1,301 1,678 1,050 2,150 Debtors 1,696 1,835 2,173 1,450 2,850 Ot. Curr. assets & loans & adv Tot.curr. assets & loans & adv. 3,445 5,107 4,506 4,555 5,412 Current liab. and provisions 2,136 2,040 1,716 1,945 2,201 Miscellaneous Exp not w/off Net current assets 1,309 3,067 2,790 2,609 3,211 Total assets 2,766 4,726 5,488 5,556 6,341 Exhibit 12: Cash Flow Y/E March FY14 FY15 FY16 FY17E FY18E CF from operations Net Profit 719 1, Depreciation & amortization Change in working capital (382) (364) (1,234) 1,547 (2,279) Minority interest (4) Loss on sale of business/fixed assets Other non-cash charges - - (2) (2) (2) CF from operations (162) 1,877 (1,195) CF from investments Capex (52) (364) (1,319) (485) (431) CF from investments (52) (364) (1,319) (485) (431) CF from financing Inc / (dec) in long term debt 37 (432) Dividends paid (104) (70) (68) (106) (72) Increase in general reserve Share issuance / (repurchase) CF from financing (67) 801 (11) (35) 78 Net Cash Flow 397 1,348 (1,492) 1,357 (1,548) 6

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8 The opinions and projections expressed herein are entirely those of the author and are given as part of the normal research activity of Centrum Broking and are given as of this date and are subject to change without notice. Any opinion estimate or projection herein constitutes a view as of the date of this report and there can be no assurance that future results or events will be consistent with any such opinions, estimate or projection. This document has not been prepared by or in conjunction with or on behalf of or at the instigation of, or by arrangement with the company or any of its directors or any other person. Information in this document must not be relied upon as having been authorized or approved by the company or its directors or any other person. Any opinions and projections contained herein are entirely those of the authors. ne of the company or its directors or any other person accepts any liability whatsoever for any loss arising from any use of this document or its contents or otherwise arising in connection therewith. Centrum and its affiliates have not managed or co-managed a public offering for the subject company in the preceding twelve months. Centrum and affiliates have not received compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for service in respect of public offerings, corporate finance, debt restructuring, investment banking or other advisory services in a merger/acquisition or some other sort of specific transaction. As per the declarations given by them, Mr. Ranjit Kapadia, research analyst and and/or any of his family members do not serve as an officer, director or any way connected to the company/companies mentioned in this report. Further, as declared by him, he has not received any compensation from the above companies in the preceding twelve months. He does not hold any shares by him or through his relatives or in case if holds the shares then will not to do any transactions in the said scrip for 30 days from the date of release such report. Our entire research professionals are our employees and are paid a salary. They do not have any other material conflict of interest of the research analyst or member of which the research analyst knows of has reason to know at the time of publication of the research report or at the time of the public appearance. While we would endeavour to update the information herein on a reasonable basis, Centrum, its associated companies, their directors and employees are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Centrum from doing so. n-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or Centrum policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any certain other circumstances. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Centrum Broking Limited or its group companies to any registration or licensing requirement within such jurisdiction. Specifically, this document does not constitute an offer to or solicitation to any U.S. person for the purchase or sale of any financial instrument or as an official confirmation of any transaction to any U.S. person unless otherwise stated, this message should not be construed as official confirmation of any transaction. part of this document may be distributed in Canada or used by private customers in United Kingdom. The information contained herein is not intended for publication or distribution or circulation in any manner whatsoever and any unauthorized reading, dissemination, distribution or copying of this communication is prohibited unless otherwise expressly authorized. Please ensure that you have read Risk Disclosure Document for Capital Market and Derivatives Segments as prescribed by Securities and Exchange Board of India before investing in Indian Securities Market. price chart v-13 May-14 v-14 May-15 v-15 May-16 v-16 Ltd Source: Bloomberg, Centrum Research 8

9 1 Business activities of Centrum Broking Limited (CBL) Disclosure of Interest Statement Centrum Broking Limited (hereinafter referred to as CBL ) is a registered member of NSE (Cash, F&O and Currency Derivatives Segments), MCX-SX (Currency Derivatives Segment) and BSE (Cash segment), Depository Participant of CDSL and a SEBI registered Portfolio Manager. 2 Details of Disciplinary History of CBL CBL has not been debarred/ suspended by SEBI or any other regulatory authority from accessing /dealing in securities market. 3 Registration status of CBL: Ranjit Kapadia is registered with SEBI as a Research Analyst (SEBI Registration. INH ) 4 Whether Research analyst s or relatives have any financial interest in the subject company and nature of such financial interest 5 Whether Research analyst or relatives have actual / beneficial ownership of 1% or more in securities of the subject company at the end of the month immediately preceding the date of publication of the document. Granules India 6 Whether the research analyst or his relatives has any other material conflict of interest 7 Whether research analyst has received any compensation from the subject company in the past 12 months and nature of products / services for which such compensation is received 8 Whether the Research Analyst has received any compensation or any other benefits from the subject company or third party in connection with the research report 9 Whether Research Analysts has served as an officer, director or employee of the subject company 10 Whether the Research Analyst has been engaged in market making activity of the subject company. Rating Criteria Rating Market cap < Rs20bn Market cap > Rs20bn but < 100bn Market cap > Rs100bn Buy Upside > 20% Upside > 15% Upside > 10% Hold Upside between -20% to +20% Upside between -15% to +15% Upside between -10% to +10% Sell Downside > 20% Downside > 15% Downside > 10% Member (NSE and BSE) Regn.: CAPITAL MARKET SEBI REGN. NO.: BSE: INB CAPITAL MARKET SEBI REGN. NO.: NSE: INB DERIVATIVES SEBI REGN. NO.: NSE: INF (TRADING & CLEARING MEMBER) CURRENCY DERIVATIVES: MCX-SX INE CURRENCY DERIVATIVES:NSE (TM & SCM) NSE Depository Participant (DP) CDSL DP ID: SEBI REGD NO. : CDSL : IN-DP-CDSL PORTFOLIO MANAGER SEBI REGN NO.: INP Website: Investor Grievance ID: investor.grievances@centrum.co.in Compliance Officer Details: Kavita Ravichandran (022) ; ID: compliance@centrum.co.in Centrum Broking Ltd. (CIN :U67120MH1994PLC078125) Registered Office Address Bombay Mutual Building, 2nd Floor, Dr. D. N. Road, Fort, Mumbai Corporate Office & Correspondence Address Centrum House 6th Floor, CST Road, Near Vidya Nagari Marg, Kalina, Santacruz (E), Mumbai Tel: (022)