Karachi, December 08, 2022 (PPI-OT): SEARL: FY22 inflation linked price increase to support margins in 2QFY23

The Searle Company Limited (SEARL) held its Analyst Briefing to discuss the company’s financial performance and future outlook. Despite higher sales, profits for 1QFY23 quarter deteriorated on a QoQ basis primarily due to decline in gross margins and higher financial charges.

Growth momentum in sales is expected to continue in terms of both value and volume as prices are expected to increase considerably under high inflation levels, whereas demand for medicines has seen a rise post countrywide floods.

So far, the company has not been facing any issues with opening of LCs. Having said that, keeping the ongoing situation in view, the management prudently plans to hold 2-3 months inventory to avoid any delays.

Higher finance costs weigh in on 1QFY22 profits, down 11% QoQ

The Searle Company Limited (SEARL) held its Analyst Briefing for FY22/1QFY23 to discuss the company’s financial performance and future outlook. To recall, SEARL posted an EPS of Rs0.75 during 1QFY23, down 11% QoQ and lower by 68% YoY primarily due to decline in gross margins owing to rising cost of production and higher financial charges. Net sales during 1QFY23 however clocked in higher at Rs8.2bn, up 6% QoQ as demand remained intact despite tough macro conditions.

Growth trajectory remains intact

SEARL has a notable presence in a number of segments such as Cardiovascular, Pain Management, Gynae, Cough suppressant and more. The company has a diverse product portfolio in which 6 brands have sales contribution of more than Rs1bn and 8 brands with sales contribution of Rs500mn+ driving a 5-year net sales CAGR of 17% and making SEARL Pakistan’s among the largest Pharmaceutical company in terms of volume with the top 10 products accounting for 46% of total sales.

Rising cost of production to take its toll on margins

Despite growth in net sales, margins of the company have contracted over the past couple of quarters from 45% in 3QFY22 to 40% during 1QFY23 amid rising cost of production with high rates inflation and PKR devaluation. With regulated prices, margins are expected to suffer in the upcoming quarters as well with 20%+ inflation levels. To recall, prices are regulated through a CPI linked pricing formula which is capped at 10%.

Moreover, the formula does not account for PKR devaluation. With 95% of total raw materials currently being imported mostly from China and India, the company has been pushing for a one-time price increase allowance by DRAP to cater to the recent rise in cost due to PKR devaluation. This increase will be over and above the allowance under the CPI linked formula and will help boost company’s gross level performance.

Increasing inventory levels in anticipation of LCs issue

Momentum in net sales is expected to continue in terms of both value and volume as prices are expected to increase considerably under high inflation levels whereas demand for medicines has seen a rise post countrywide floods. On the exports front, the company currently caters to 16 countries while 5 new markets are expected to be added to the list.

With regards to raw material procurement, the company so far has not been facing any issues with opening of LCs. However, keeping the ongoing situation in view, the management plans to hold 2-3 months inventory in case issues do arise. Margins are expected to witness respite in 2QFY23 as the impact of FY22 inflation linked price increase weighs in. Near term quarters, however, are expected to depict a declining trend owing to higher cost of production. With interest rates on the rise, finance cost is expected to remain a burden on the bottom line as well.