Karachi, September 22, 2023 (PPI-OT): AGP: Resilient margins despite rising costs

AGP Limited (AGP) held its Analyst Briefing yesterday to discuss its 2QCY23 financial performance and outlook. We discuss key takeaways from the meeting. To recall, AGP posted an EPS of Rs0.99 for 2QCY23, down 22% QoQ largely due to imposition of Super Tax, higher Selling charges and rise in finance costs amid higher interest rates.

While sharp PKR depreciation against US$ and inflation are potential challenges, the recent upward revision in pharma pricing policy is likely to limit the impact on margins.

We maintain our 'Buy' call on the stock with a TP of Rs100, as the stock still trades at attractive P/E levels of 7.4x/5.6x on CY23/CY24 earnings, respectively, reflecting ~60% discount to historical multiples.

2QCY23: EPS declines 22% QoQ

AGP held its Analyst Briefing yesterday to discuss its recent financial performance and outlook, we discuss key takeaways from the meeting. To recall, AGP posted an EPS of Rs0.99 for 2QCY23, down 22% QoQ largely due to imposition of Super Tax (resulted in effective tax rate of 44% for 2Q), higher Selling and Distribution charges and rise in finance costs amid higher interest rates. The result takes EPS for 1HCY23 to Rs2.26 (-20% YoY).

Macroeconomic threats in a regulated price environment

Challenges on the macro front have taken a toll on AGP’s cost of production, as it is directly impacted by unfavourable PKR/US$ movement given the company and industry’s dependence on imported API’s (60% of raw material cost). As the country transitions to a free-floating exchange rate and grapples with various internal and external challenges, rupee depreciation and soaring inflation have reached historic highs. These factors are expected to impact company profits, particularly due to the price regulations within the industry.

Capitalizing on synergies from Sandoz and Pfizer acquisitions

AGP acquired an additional portfolio, after Sandoz, through its SPV OBS Pakistan Pvt Ltd from Viatris which are commercialized in Pakistan primarily under the brands previously owned by Pfizer. AGP took over the business this year along with 112 sales and marketing staff. Total size of the transaction was ~Rs9.3bn financed through 75% debt and 25% equity. The portfolio includes various brands such as Norvasc, Cardura, Lyrica, Zoloft and Lipitor. The contribution to AGP’s consolidated sales started reflecting from mid Apr-2023. AGP intends to continue its focus on generating synergies and growth from subsidiaries. In July 2023, the Company obtained Shareholders' consent to enhance its equity ownership by up to 7.5% to a stake of up to 92.5% in OBS Pakistan (Pvt) Limited.

Maintaining ‘Buy’ stance on stock

We expect the approval by ECC in Apr-2023 to raise caps for essential and non- essential drugs to have a positive on the company’s revenue. The price caps have been revised from 7% to 14% for essential (70% of CPI), and from 10% to 20% for non-essentials (100% of CPI), respectively for FY24.

Nevertheless, it is worth noting that the expected rise in production costs is likely to outpace the increase in revenue, our base case EPS for CY23/CY24 stand at Rs6.8/Rs9.0, respectively. AGP has consistently demonstrated superior performance in terms of gross margins when compared to industry peers, the outgoing half year results were not an exception (refer graph).

We maintain our ‘Buy’ call on the stock with a TP of Rs100 as the stock trades at attractive P/E levels of 7.4x/5.6x for CY23/24, respectively reflecting ~60% discount to historical multiples.