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STOCK UPDATE PTC India
Recommendation: Buy
Price target: Rs88
Current market price: Rs57 Q4FY2013 results-First cut analysis Result highlights Sales exhibited healthy growth, in line with our expectations: PTC India (PTC) reported sales of Rs2,199 crore, indicating a growth of 52% year on year (YoY) and 17% quarter on quarter (QoQ). This is in line with our estimate. The sales growth was driven by a volume growth of 52% YoY and 15% QoQ. During this quarter, the total volume traded by the company was 6,732 million units, reflecting a blended realisation of Rs3.27 per unit. The blended realisation during Q4FY2013 remained flattish with a 2% decline YoY and 1% improvement QoQ. Tolling business fuelled operating profit growth: The operating profit grew by 59% YoY and 71% QoQ to Rs51.2 crore in Q4FY2013. The volume of power sold jumped by 54% YoY attributing largely to the operating profit growth; nevertheless, a better operating profit margin (OPM) also supported it. We believe contribution of tolling volume (which earns better margin) in the total volume would be attributed to the improved margin in Q4FY2013 (2.3%) over that of Q4FY2012 (2.2%). The tolling business started contributing from Q1FY2013 only.
Sequentially, the margin expansion was quite evident (by 73 basis points QoQ) as the operating profit jumped by 71% on a sales growth of 17% QoQ in Q4FY2013. The volume of power sold through the tolling arrangement improved by 34% QoQ to 304.08MU. Moreover, the cost of coal per unit for tolling volume (depicting softer coal prices in the international market) was 9% lower sequentially. As a result, the tolling business perked up the OPM in Q4FY2013, with better volume and lower fuel cost. Combined effect of other income and interest cost influence PAT performance: On a Y-o-Y basis, the lower other income partially net off gain earned at operating level. The profit before tax (PBT) grew by 32% YoY in Q4FY2013 on an operating profit growth of 59% YoY as the other income declined sharply by 84% to Rs2.3 crore. Though the interest cost dropped to negligible in Q4FY2013, the fall in other income was much higher and sharper. On a sequential basis, the improvement recorded at operating level almost trickled down till the net profit level. Eventually, the reported profit after tax (PAT) grew by 23% YoY and 70% QoQ to Rs37 crore. Adjusting prior period item and extraordinary item, the adjusted PAT stood at Rs38 crore in Q4FY2013. Annual volume pushed operating profit but dip in other income restricted PAT growth: The operating profit as well as sales growth of 16-17% was largely derived from an improvement in the power volume. However, the lower other income restricted the PAT growth to 7% YoY in FY2013, despite a 16% growth at the operating profit level. Improved working capital days: During FY2013, PTC managed to improve its working capital efficiently with an improvement in the debtor as well as in creditor days. The payment of Rs375 crore and Rs513 crore received from the state electricity boards of Tamil Nadu and Uttar Pradesh respectively during the year helped the company to reduce its debtor days to 88 days from 123 days in FY2012. The receivable in the balance sheet dropped by Rs439 crore YoY to Rs2,142 crore in FY2013. The management expects that the dues from the state electricity board of Tamil Nadu should reduce to zero in the next couple of months too. On the creditor front, PTC has reduced the creditor days to 48 days in FY2013 from 63 days in FY2012. With all this positive development, the management expects to maintain a healthy cash balance, which is more than Rs350 crore at the end of FY2013. View: The payment received from the state electricity boards of Tamil Nadu and Uttar Pradesh to the tune of Rs375 crore and Rs513 crore respectively is a positive development for the company. Moreover, the management expects these sticky receivables from these two state electricity boards to come down significantly in FY2014, which was a major hangover for the stock. On the back of the improving balance sheet status and a likely improvement in the earnings led by an incremental volume (supported by tolling route and long-term business), we remain positive on the stock and retain our price target of Rs88 with a Buy rating. Sun Pharmaceutical Industries
Recommendation: Buy
Price target: Under review
Current market price: Rs970 Taro reports slower growth in Q4FY2013 Key points -
Growth slows in Q4FY2013; non-recurring expenses impact bottom line: After witnessing a stellar performance in M9FY2013, Taro Pharmaceutical (Taro), which is a 66.3% subsidiary of Sun Pharmaceutical Industries (Sun Pharma), has reported a lower than expected performance in Q4FY2013. The net revenues jumped by 13.8% year on year (YoY) to $165 million, which is 6% lower than our estimate. The gross profit margin (GPM) expanded by 400 basis points YoY to 72.4% on better pricing of products in some of the key drugs. However, sequentially, it is nearly 300-basis-point lower than that of the previous quarter (ie Q3FY2013). The company has indicated that there was a decline in volume during the quarter, which implies an increase in the prices of some of the products. However, the net profit witnessed a marginal growth of 4% to $49.17 million during the quarter, mainly due to the non-recurring loss of $22 million related to settlements and contingencies of various litigations. Without these expenses, the net profit would have increased by 51% YoY to $71.2 million during the quarter. -
Marginally negative for Sun Pharma: Taro contributes nearly 28% of Sun Pharma's revenues and 38% of the profit before tax (PBT). The slower than expected revenues of Taro translate into an impact of 2% and 7% on our revenue and PBT estimates of Sun Pharma for Q4FY2013 respectively. We expect Sun Pharma to report a growth of 38.5% YoY in sales to Rs3,226 crore but only a 5% rise in the net profit to Rs862 crore in Q4FY2013. However, given a 300-basis-point decline quarter on quarter (QoQ) in the GPM of Taro, Sun Pharma is likely to see pressure on the operating profit. However, given the other elements of growth, like newly acquired DUSA Pharmaceuticals and generic business of URL Pharma in the US market, Sun Pharma may be able to make up the shortfall in revenues and profit from Taro Pharma.
We will revisit the numbers of Sun Pharma after the Q4FY2013 results, which are scheduled on May 28, 2013. -
Valuation: The stock is currently trading at 24.2x FY2015 earnings. We have Buy rating on the stock, while we keep our price target under review.
VIEWPOINT Wockhardt USFDA imposes import alert on Aurangabad facility The management of Wockhardt conducted a teleconference call with analysts recently to clear its position on the import alert imposed on its Aurangabad-based injectible and solid dosages facilities by the US Food and Drug Administration (USFDO). Highlights of the call -
Import alert: The USFDA has imposed an "import alert" on the company's plants located at Walun, Aurangabad following an inspection of the injectible facility in March 2013. The inspection had highlighted deviations from the USFDA-prescribed good manufacturing norms (called "483s" observations). An import alert implies that the company would not be able to export the products manufactured from that particular facility to the US market. As the location also houses the facilities for production of solid dosage forms and the import alert covers the entire location, shipment of solid dosages would also be blocked from the facility. -
Revenue loss of over $100mn: The management estimates a revenue loss of around $100 million, with the injectible business accounting for $20-25 million of the loss and the solid dosage forms accounting for the balance. However, the management's estimates are based on the financials for FY2012. We believe the revenue loss could be higher if the M9FY2013 performance is considered instead. -
50% of ANDAs filed would remain unapproved till matter is resolved: Wockhardt has currently 48 abbreviated new drug applications (ANDAs) pending approval of the USFDA. Of these 50% (ie 24 ANDAs) has been filed from the site facing the import alert. These ANDAs would remain unapproved till the USFDA clears these facilities or the company successfully transfers these products to a new site. -
Major drugs are not affected: Major drugs like Toprol and Flonase (estimated to generate revenues of $150-200 million) are not manufactured at the site under import alert and therefore would not be affected. -
A two-pronged strategy to address problem; management expects resolution within 7-8 months: The management is immediately taking two major steps to address the problem. One, it will hire a consultant from the USA (at a likely cost of $2 million) to address the problems raised by the USFDA; and two, it will try to transfer the majority of the products to an alternate site, which is USFDA approved or is likely to receive the USFDA's approval. The management expects the site transfer to take seven to eight months and as much as 80% of the products could be shifted to the alternate site. Therefore, a major part of the revenues lost due to the import alert would be restored in seven to eight months. However, this is subject to successful inspection of the company's Chikalthana facility (Aurangabad) scheduled in July-August 2013. Also, the management would try to segregate the injectble facility (where the real issue has cropped up) from the solid dosages facility, which has been affected for being located in the vicinity of the injectible unit. -
Our view: The import alert is set to severely affect Wockhardt , which has just come out of a corporate debt restructuring process after selling part of the business and aggressively tapping the US market through some key launches. Though the management estimates the revenue loss at $100 million (80% of which would be restored in the next seven to eight months) but we believe the impact would be greater. Apart from market share loss in the USA (which would be difficult to restore in a short time), the company will have to incur capital expenditure to make the injectible facility good manufacturing practices (GMP)compliant (to satisfy the USFDA) and to transfer the site. However, an early resolution of the matter would be a saving grace. -
Valuation: We believe apart from an earnings loss, the stock may see derating, given the level of uncertainty in dealing with the USFDA. Before the import alert the stock was trading at 13x FY2014E earnings per share (EPS) estimate of Rs127. Taking into account the tentative revenue loss of $100 million and a proportionate loss in the net profit, the EPS estimate for FY2014 should reduce by 8% to Rs126.
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