|Panacea Biotec Ltd (Panacea) has so far witnessed strong business momentum in both combination vaccines and formulations. While demand continues to gain traction, Panacea's growth will likely hit a roadblock as WHO (World Health Organisation) has de-listed its combination vaccines, including the high-margin EasyFive, from the pre-qualified list of vaccines. We have lowered our FY12 estimates to account for the loss in business. However, we maintain our fundamental grade of 3/5 as we believe that the problem is likely to be a short term one and the long-term business prospects look optimistic. Growth momentum in combination vaccines stalled in the near term.
Combination vaccines had been witnessing strong traction in demand, apparent from EasyFive's ~220% y-o-y revenue growth in FY11. WHO has recently delisted the product because of quality management issues. Consequently, we expect growth to get stalled as UNICEF is the largest customer. However, management is expecting to fix the issue in 3-4 months. We expect the supplies to resume by Q1FY13 and remain optimistic on the long-term growth prospects of combination vaccines.
Expect gradual de-growth in polio vaccine sales
Polio vaccine sales declined by ~17% y-o-y in FY11 largely due to: 1) decline in procurement by UNICEF because of increase in polio eradication globally, and 2) Indian government now procuring vaccines on need basis only. However, we view limited near-term risk to demand for polio vaccines given the significant number of cases still recorded globally. Going ahead, we expect sales to de-grow, but on a more gradual curve.
New products and geographic expansion to benefit formulations
Formulation sales grew ~24% y-o-y in FY11, largely driven by strong traction in its existing products and entries into new markets. Exports grew by ~110% driven by strong demand for Tacrolimus and Cyclosporine in Latin America. Going ahead, we believe that catalysts such as expected approval in regulated markets and launch of new products will continue to crank the growth engine.
Revenue growth and profitability curve to cave-in in FY12
We expect FY12 revenue to decline ~25% y-o-y to ~Rs 8,650 mn and EBITDA margin to contract by 1,440 bps to ~8% on loss of EasyFive sales to UNICEF and higher raw material costs driven by unfavourable forex movement. We expect revenue and margins to improve to ~Rs 11,934 mn and 19.0% in FY13.
Valuations – the current price has 'upside'
Based on our new estimates, we arrive at a fair value of Rs 100 per share. We propose a valuation grade of 4/5, indicating that the market price has upside from the current levels.