Cadila Healthcare’s 4Q was ahead of estimates by 10% at the operating level, driven by higher royalty income in the quarter. Though there is limited clarity on FY14 US launches, Nomura believes FY15 launches are likely to be significant enough to drive margins
CDH’s (Cadila Healthcare) 4Q was ahead of Nomura’s estimates by 10% at the operating level, driven largely by higher royalty income in the quarter. Gross margins remain under pressure due to a price drop in the US market and higher contribution from Authorised generic sales, said Nomura Equity Research in its Quick Note on the company’s fourth quarter performance.
EBITDA margin at 18.6% in FY13 dropped 301 bps (basis points) y-o-y and is the lowest in many years. US approvals remain the most important factor driving margins. There is limited visibility on interesting US launches in FY14. Therefore, most of the margin expansion is expected in FY15 when most of the interesting approvals are expected to contribute.
The management’s guidance of a 15% effective tax rate (versus 25%-30% earlier) to an extent negates the risk of slippage in the US, said Nomura. “We are currently reviewing our earnings estimates. On our current estimates, the stock is trading at 18.6x FY14F and 16x FY15F EPS, a 0-25% discount to other generic companies, which we believe is justified given near-term earnings risk. We remain Neutral,” the brokerage added.
Cadila Healthcare reported sales at Rs15.6 billion, a growth of 16.5% y-o-y, 1.6% ahead of Nomura’s expectation. Gross margins were the lowest in the past 28 quarters, declining 367 bps y-o-y. Gross margin was under pressure due to pricing erosion in the base US business, price erosion in Taxotere and higher contribution from authorised generics sales. However, employee cost and other expenses were lower than our estimate and as a result EBITDA margins were in line with estimates, said Nomura. Net earnings were boosted by a tax write-back.
For the quarter, EM and Europe recorded 86% and 36% growth y-o-y, respectively. The growth in Europe was driven by France and Spain. EM growth was driven by countries in Asia-Pacific and Africa, as per company. US revenues declined 1% q-o-q due to lack of any meaningful launches. For FY13, CDH launched only seven new products, including one product from Nesher. Japan revenues in rupee terms were under pressure due to yen depreciation, with sales growth at 3.7% y-o-y. India formulation growth at 14.4% was largely in line with expectations, the brokerage said.
High-value launches in the US are critical for margin expansion. However, the developments in the recent past and management commentary fail to provide clarity on such launches in the near term.
CDH has so far filed 173 ANDAs, with 97 awaiting approvals. CDH filed an impressive 33 ANDAs in FY13, which include eight injectables, two topical (the first of derma filings) and the third transdermal. The pipeline presents some interesting product opportunities, but there is limited clarity of upside being realised in FY14, believes Nomura.
CDH lost a district court case on Prevacid, which was the potential low competition opportunity near term. The hearing date for Lialda is yet to be decided. There is limited visibility on other important products such as Asacol, Toprol XL, nasal sprays and transdermals at this stage. The nasal spray facility was inspected by the USFDA last year and the transdermal facility will likely be inspected next quarter. The management suggests most of the upside will be realised at best towards the end of FY14. The company has guided for 22 approvals in FY14 (with two from Nesher) and expects moderate growth of 20% y-o-y.
Nomura expects the new price ceiling for products under NLEM (National List of Essential Medicine) to be announced soon. According to the management, the overall impact of the pricing control is estimated at 2.5% of domestic sales. The implementation could also lead to some destocking by the channel on the impacted products, thereby slowing growth in 1QFY14. New product launch momentum has been maintained, as the company launched 90 new products in India versus 92 last year. The number of first-time launches was 21 against 29 in FY12.
Brazil and Mexico have been categorised as home markets by CDH and hold long-term potential. However, the approval pace in Brazil has slowed, adversely impacting growth. The company has 100 filings in Brazil, with 18 new dossiers filed in FY13. The company has obtained three new approvals in Mexico and is planning commercial launch in 2QFY14. Overall, 20 dossiers have been filed in Mexico, of which six were filed in FY13, according to Nomura.
Consumer business recorded healthy growth of 26% y-o-y, maintaining the growth momentum of the previous quarter. The growth was driven by Sugar Free, which has now started to grow in double digits, according to the management. The company has maintained its guidance of consumer business sales reaching Rs5 billion in FY14.
JV sales at Rs1.15 billion recorded a muted 1.1% growth y-o-y. Pricing pressure in Taxotere in the Hospira JV has adversely impacted growth and more importantly margins, according to Nomura. The Hospira JV collaboration has been expanded for 12 additional products, of which site transfer has already taken place for three (two for US and one for EU). These additional products will drive volume growth, though may not add to margins, stated the brokerage. The Nycomed JV has expanded to three more APIs. Overall, the management believes that JV sales will deliver growth in FY14 on a low base.
EBITDA margin for FY13 at 18.6% (Q4 margin at 16%) was the lowest in many years, and declined 301 bps y-o-y. Nomura expects improvement in margins from here on, driven by new launches in the US, Prisim 2 initiatives to control costs and improvement in margins in countries such as France and Spain. Clearly, US approvals is the most important factor.
Though there is limited clarity on FY14 US launches, Nomura believes FY15 launches are likely to be significant enough to drive margins.
The management expects an effective tax rate at 15% going forward (including MAT credit) compared to 25%-30% guidance earlier. The capex for FY15 is estimated by the company at Rs6 billion (versus Rs7 billion in FY14), and is likely to come down thereafter.
With domestic volume declines likely to continue in the near term and not much new incremental LNG re-gas capacity available in Gujarat, volume growth outlook looks muted in the near term, said Nomura in report on GSPL’s Q4 performance
GSPL’s (Gujarat State Petronet) reported PAT of Rs1.61 billion for 4QFY13 (up 25% y-o-y, 36% q-o-q) was sharply ahead of Nomura’s forecast (Rs1.05 billion) and Bloomberg consensus (Rs1.07 billion). “Contrary to our and street view, the overall impact of tariff implementation order has been positive,” said Nomura Equity Research in its report on the company’s performance.
GSPL has applied the tariff order from 27 July 2012, and the net revenue gain of around Rs1 billion has been booked in 4Q.While the tariff order impact is positive, Nomura was surprised by the sharp decline in volumes. 4Q transmission volumes at 22.2mmscmd (its estimate: 25mmscmd) declined sharply by 29% y-o-y and 19% q-o-q. After reaching a peak in 1QFY12, volumes have been declining consistently as domestic supply keeps declining. But, now even demand is getting weaker. From the peak the volumes have declined 40%, and the near-term outlook remains weak, the brokerage report said.
GSPL has applied the Petroleum and Natural Gas Regulatory Board’s (PNGRB) tariff order (initial order on 11September 2012, zonal tariff on 19 February 2012). Rather than applying the order retroactively from 20 November 2008 (as demanded by PNGRB), GSPL has applied the tariff order from 27 July 2012 (the date of authorisation of network) in accordance with the interim order by the appellate tribunal (APTEL). GSPL has also started to book expenses for system use gas (SUG) from mid-February. SUG was hitherto not charged but taken in kind from customers. SUG charge expense is a key reason for the sharp rise in O&M expenses by 66% y-o-y and 52% q-o-q, according to Nomura.
On both retroactive implementation and SUG charges, and on several other aspects of the tariff order, GSPL has already challenged PNGRB in the appellate tribunal where the hearings are ongoing. Nomura believes PNGRB is on a weak footing (especially on demanding retroactive tariff implementation) and an early APTEL decision would bring clarity.
4Q agerage transmission volumes at 22.2mmscmd declined sharply by 29% y-o-y, and 19% q-o-q. From peak levels of 36.8mmscmd in 1QFY12, volumes have declined around 40% due to sharp decline in domestic gas availability. The company attributes the recent sharp volume decline to weak overall gas demand across sectors and very high LNG prices in Jan /Feb 2013. Current volumes also remain around 22mmscmd. With domestic volume declines likely to continue in the near term and not much new incremental LNG re-gas capacity available in Gujarat, volume growth outlook looks muted in the near term.
Unless private investments are of good quality, they can become regressive and lead to crony capitalism, as it has happened all along in the PPP model, says EAS Sarma
EAS Sarma, former secretary of the Government of India, has said that public–private partnership (PPPs) are certainly not a substitute for good governance and as suggested by United Nations Office on Drugs and Crime (UNODC) and others, unless there is total transparency, PPPs will tend to hurt the public interest. Consciously, the government should bring them within the purview of the Right to Information (RTI) Act, he said.
The former secretary, in a letter written to Montek Singh Ahluwalia, deputy chairman of Planning Commission, has said, “...the PPP route that the Planning Commission has so aggressively promoted all these years has opened doors to large-scale corruption in the country. The magnitude of the PPP scam is huge as the investments involved are large and the value of the public lands handed over to the private parties is enormous.”
There are around 758 PPP projects worth Rs4 lakh crore already taken up. They are largely in infrastructure sectors such as roads, energy, airports, ports and metros and in development sectors such as education, health and housing. The magnitude of investment in PPPs in India seems to be much higher than the global average. It amounts to 20%-30% of gross domestic product (GDP), whereas the global average is around 15%.
According to the UNODC report, in the absence of laws to govern either PPPs or public procurement procedures, the way these projects have been formulated and implemented has created an enormous scope for rent seeking and deficiencies in their outcomes.
“The General Financial Rules, 2005, are the rules followed for public procurement by government departments and ministries across the country. These rules do not have the status of legislation and violations do not attract much penalty. India currently has no clear rules for regulating PPP projects,” the report says.
In most cases, there was no competitive bidding for selecting the developers. Where there was competitive bidding, the tendering processes were rigged to select pre-determined bidders. The so called ‘independent’ consultants were not so independent, as many of them had a conflict of interest. In many cases, the companies were found to have colluded with the consultants. The bidders often misrepresented the facts to win the orders and misreported revenue to avoid revenue share to the government. The concerned government officials who were expected to ensure fairness in the selection of bidders and monitoring implementation awere either incompetent or outright corrupt.
In many PPP projects, public land is handed over to the private developer at a nominal rate and the suppressed value of the land is considered in computing the equity share of the government. As a result, the government becomes the minority shareholder. Had the market value of the land been considered, the equity share of the government in the PPP would have exceeded 50%, in which case it would have become a government company under the Companies Act.
As a result of undervaluation of the land and the consequent undervaluation of government equity, the PPP project surreptitiously avoids the rule of reservation for SCs/ STs/ OBCs. Since the government in such a case is only a minority shareholder, the private promoter often takes decisions not entirely consistent with the public interest. The government directors who are required to keep a watch over the affairs of the PPP have often become silent spectators or they have connived with the private promoter for personal gains.
“The Emaar MGF scam in AP is an example of this. In AP, there is a law, the AP Infrastructure Development Enabling Act of 2001which requires competitive bidding procedures to be followed in selecting the promoters of ‘mega’ projects but, rarely, has this law been complied with," Mr Sarma added.
There has been undue delay in the Centre enacting the Public Procurement Bill. One is not sure about the intentions of the government towards probity in procurement when ministries/departments such as coal, mines, telecom and atomic energy have openly defied all norms of transparency and competition in procurement by championing subjective procedures in allotment of coal and mineral blocks, sale of spectrum and placement of orders on multi-national companies (MNCs) on a nomination basis for nuclear power projects worth billions of dollars. The central ministries have in fact gone to the extent of swearing before the courts that such opacity and subjectivity are a necessity and a virtue.
Mr Sarma, the former secretary said, “I hope that the earlier IMF study on PPPs in 2006, my own EPW review of that study and the latest UNODC study wake up the government and the Planning Commission to the ground realities and trigger corrective steps before any further damage is caused.”
Here is the UNODC report on India: Probity in Public Procurement...