JS Securities Limited – JS Research (January 18, 2022)

Karachi, January 18, 2022 (PPI-OT): Pharma: Higher sales and stable margins supported bottom-line growth

Pharmaceutical sector underperformed the benchmark index by ~13% in CY21 (-11% performance), the sector currently trades at a trailing P/S and P/E of 1.3x and 14.1x, respectively.

Despite rising input costs during the past four quarters, the sector managed to maintain its gross margins at ~39% where AGP, SEARL and HINOON showed the highest gross level performance in the listed space.

In the trailing four quarters, the sector’s profits jumped by 28% YoY on account of 12% YoY higher sales and improved operational efficiencies depicted by a 25% rise in Operating profit for the period.

Higher sales and stable margins post lockdown

COVID-19 has significantly altered the landscape of pharmaceutical sector in the last 2 years. Measures taken by the GoP to vaccinate population during 2021 yielded positive results with Covid cases recording a significant decline in recent months. We believe that the pharma sector is rightly placed in taking advantage of new opportunities resulting from an increased emphasis on healthcare and development of vaccines. As a result of which the sector posted a 12% YoY growth in revenue in the last 12 months with average gross margins clocking at ~39% for the recent 4 quarters. The sector however, still underperformed the KSE-100 index by ~13% in CY21 (-11% performance), pharma sector currently trades at an attractive trailing P/S and P/E of 1.3x and 14.1x, respectively. This depicts that market participants are discounting sector’s potential growth implied by its historical P/E of over ~20x.

Profitability swells by more than ~30% YoY

We review Pharma sector’s financial performance during the recent four quarters with a sample size of nine companies (refer table) as a proxy to the listed sector. During the last 12 months, the sector’s top-line expanded by double-digit growth of 12% as compared to the same period last year as economic activity revived in the country. As the sector fell under the essential segments category, we highlight that the Pharma sector remained operational and available throughout the lockdown quarters, but demand was mainly high for drugs related to Covid-19 as opposed to regular prescription drugs which witnessed a lower demand. Similarly, companies which export also faced dampened export sales during last 12 months due to dull demand from Afghanistan.

Better growth ahead

Despite rising input costs during the past four quarters, the sector managed to maintain its gross margins at ~39% where AGP, SEARL and HINOON showed the highest gross level performance in the listed space. Higher volumetric sales led to economies of scale where contained distribution costs helped in showing an increase of 25% YoY in operating level profitability. Moreover, with relatively low leverage levels and improved interest coverage the sector’s after-tax profitability during the same period also improved by 28% YoY. As per latest Finance Act (supplementary bill), the sector has been placed under zero rating and the sales tax paid on input would be refundable where if refunds are not made within 7 days the same would be eligible for adjustment against tax liability of the company as per the new directive.

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