Karachi, June 08, 2023 (PPI-OT): AGP: Recent price revision to limit margin trim, 'Buy' intact

We revise our base case for AGP Ltd (AGP), given recent financial results, deteriorating macro conditions and recent approval of increase in drug prices by the ECC.

While sharp PKR depreciation against US$ and inflationary pressures have dented projected margins, the recent upward revision in pharma pricing policy, albeit for FY24 only, has limited the potential dent to margins. As a result, earnings that had a potential downward revision of ~25%, now revises down by ~19%.

We, however, maintain our 'Buy' call on the stock with a revised Dec-23 TP of Rs105, as the stock still trades at attractive P/E levels of 7.8x/5.9x, reflecting ~60% discount to historical multiples.

Macros a key threat as prices remain regulated

The ongoing macro challenges have taken a toll on AGP’s cost of production, as it is directly impacted by PKR/US$ movement given the company and industry’s dependence on imported API’s (60% of raw material cost). With the country moving towards a free-floating exchange rate and facing multiple other challenges both internally and externally, PKR/US$ has spiralled to record levels in a short span of

time. Similarly, inflation has hit record high levels as well both of which are expected to take a toll on company profits as prices in the industry remain regulated. Industry stakeholders have long been demanding a one-time price increase of 38% by DRAP other than the price increase allowed under the CPI linked formula using a similar increase in FY19 as precedent.

ECC approves increase in drug prices

The economic coordination committee (ECC) of the cabinet in Apr-23 approved increase in prices of medicines as recommended by DRAP. The increase comes post rapid escalation in the cost of production with the dollar rate and inflation rate touching record levels, both of which remain key factors for the sector.

Previously, price increase for essential drugs, was calculated as 70% of inflation capped at 7% and 100% of inflation capped at 10% for non-essentials. Now, with inflation soaring close to 40%, the ECC has approved the recommendation of DRAP raising the caps for both essential and non-essentials to 14% and 20% respectively, albeit for FY24 only.

Incorporating recent developments, ‘Buy’ intact

We expect the development to have a positive impact on AGP’s topline, limiting margin suppression during CY23, before returning towards an increasing trend post CY24. However, as the increase in cost of production is expected to outpace the revenue jump, our base case EPS for CY23 and CY24 now stands at Rs6.9/Rs9.1 (revised down by ~19%).

We, however, maintain our ‘Buy’ call on the stock with a revised Dec-23 TP of Rs105 where given its recent price performance, CY23/CY24 earnings still trade at attractive P/E levels of 7.8x/5.9x, respectively.