Given the competitive landscape and supply constraints faced by Perrigo and West Ward, Nomura believes the generic Depo Testosterone would be an interesting opportunity for Sun Pharma
Sun Pharma on Tuesday announced that it had obtained final approval for generic Depo Testosterone ($130 million in sales as per IMS). Nomura Equity Research points out that the product is already generic and in short supply in the US as Perrigo and West Ward are facing supply constraints as per the American Society of Health System Pharmacists since 8 May 2013.
Perrigo is supplying the product on intermittent back orders as the product becomes available as per the FDA website. West Ward also has the product on back order but the company currently does not have an estimate for a release date.
Other than the innovator (Pfizer), Perrigo and West Ward, Watson is currently on the market for the 200mg / ml multi dose vial. The multi-dose vial for 200mg accounts for around $75 million sales as per IMS. Sun Pharma would be the fourth generic player in the market for this SKU.
The 200mg single dose vial accounts for around $50 million as per IMS data. Other than Pfizer, currently only Perrigo is in the market for the product but is facing supply shortages due to constrained raw material supply and increased demand. Sun Pharma would be the second generic player to launch in the SKU.
The 100mg multi dose vial accounts for around $4m in sales as per IMS. It appears that Sandoz has withdrawn from the market and Sun Pharma would be the only generic player in the space.
Given the competitive landscape and supply constraints faced by Perrigo and West Ward, Nomura believes the product would be an interesting opportunity for Sun Pharma. The brokerage is reviewing its estimates for Sun Pharma.
Assuming the historical run rate over the past few years, Nomura expects the restructured loan delinquency for large PSU banks like PNB, BoB and SBI to go up 130% to 360%
Worried over rising non-performing assets (NPAs), the Reserve Bank of India on 30 May 2013 tightened rules for restructuring of most types of loans in line with global practices.
As per the latest RBI notification, provisioning on the newly restructured account has been raised to 5% from 1st June from 2% now. However, for the old restructured account it will be done in a phased manner.
Nomura Equity Research assesses the likely earnings impact of the restructuring done over the last few years by the PSU banks covered by the brokerage. It has highlighted the following key points:
1) Assuming the historical run rate of delinquency from the restructured loans seen over the past few years, Nomura expects an increase in restructured loan delinquency in the range of 130%-360% for large PSU banks like PNB, BOB & SBI.
2) More worrying is the huge increase in provisioning that will be required given this sharp increase in delinquency from restructured loans. The brokerage estimates that even if provisions from delinquencies from the standard loan book decline in FY14, the provision charges required on account of the delinquency from the restructured loans will ensure that total LLPs in FY14 will stay at elevated levels.
After examining the data in greater detail Nomura believes that delinquency from restructured accounts will more than offset any likely reduction in fresh delinquencies from the standard loan book. Higher delinquencies from restructured book will also mean that the banks will have to provide higher for these loans as loans from restructured book can straight away fall into D1-D3 category (which attracts higher provisioning) instead of falling into sub-standard category as the ageing of that NPL will be defined from the date of restructuring instead of the date of it slipping into NPL. It is likely that there will be further downward pressure on the current FY14F consensus estimates for the PSU banks.
The above table indicates the delinquencies and provisions that are likely to arise out of the restructured book. Nomura has assumed the following delinquency rates in FY14F from the loans restructured in different vintages—30% from the FY10 cohort, 25% from FY11, 20% from FY12 and 5% from FY13. In terms of provisions, the brokerage has assumed that 1) delinquencies from loans restructured in FY10 will attract around 100% provision as it may straightaway go in to D3 category, 2) delinquencies from FY11 book will attract around 60% provision as it may straightaway go in to D2 or D3 category, 3) delinquencies from FY12 book will attract around 40% provision as it may straightaway go in to D1 category, 4) delinquencies from FY13 book will attract around 15% provision as it may go in to sub-standard category. Accounting for these delinquency rates and provisioning charges, it has estimated the following delinquency and provision estimates that could arise out of the restructured loan books in FY14F.
In the table above, Nomura highlights what the actual delinquencies were in FY13 and within that how much resulted due to delinquency out of the restructured book. It compared this data with the likely delinquencies that may come in FY14 from restructured book. There is a possibility of an increase in the delinquency from restructured book component by Rs33.5 billion for BOB, Rs23.9 billion for PNB and Rs10 billion for SBI. Now, even if we assume some down-tick in delinquencies from the standard loan book, the additional delinquencies from the restructured book in FY14F could likely take the delinquency run-rate higher especially for BOB and PNB in FY14.
The above table highlights LLPs for FY13 and Nomura assumes that delinquencies from restructured book would have attracted around 30% provisioning on an average. Now if we compare that from the LLPs that could arise out of delinquencies from restructured book in FY14F, we notice that in FY14F provisions towards delinquencies from restructured book could likely increase by around Rs18.7 billion for BOB, Rs13.7 billion for PNB and Rs10.9 billion for SBI. Even if we assume some decline in delinquencies from standard loan book and hence lower provisions on that count, the additional provisions on the delinquencies from restructured book in FY14F could likely take the LLPs higher in FY14 as compared to FY13, said Nomura.
Nomura did not consider any benefit arising out of upgrades from restructured book which will release provisions of 2.75% currently as it believes that this will largely offset the higher provisions that the bank will have to make on the fresh restructured loans at 5% and 75 basis points (bps) increase in provisions on existing restructured book. Now, one could argue that all the delinquencies may not come in FY14 itself and some may be pushed down to FY15. Considering that is a possibility the brokerage has factored in lower delinquency rates for the more recent years in order to account for some push over of delinquencies from restructured book.
Deterioration from the restructured loan book is likely to haunt the PSU bank’s asset quality over the next few years. Given the huge increase in restructured loan books over FY12-13, the historical evidence for delinquency from these books and the low provisioning level, one can expect elevated levels of loan loss provisions for the PSU banks, Nomura says in conclusion.
The key points of the final guidelines on restructured loans:
The RBI also said that existing “regulatory forbearance” would no longer be available from 1 April 2015.
As per existing guidelines, an account after restructuring is not classified as NPA. However, as per the new norms, a restructured account would be treated as NPA.
“This may be made applicable with immediate effect in cases of new restructuring but in a phased manner during a two-year period for the existing standard restructured accounts,” the central banks added.
As a result, the banks will have to do higher provision which will have negative impact bottom lines.
The new bank licenses, when issued, are likely to usher in greater innovation and competition into the Indian banking sector. The guidelines are stringent understandably but the opportunity for the winners can be immense
The Reserve Bank of India (RBI), which had on 22nd February issued final guidelines for issuing new banking licences, on Monday came up with clarifications to various queries, as many as 443 from 39 entities, raised by prospective licence seekers.
Nomura Equity Research looks at the impact of the clarifications. According to the brokerage, the RBI will grant no forbearance for maintenance of Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR) and Priority Sector Lending (PSL) requirements.
Judging whether a promoter group has sound credentials and integrity is an issue of ‘judgment’ and no specific measures have been enumerated, Nomura said.
Para-banking activities, such as credit cards, primary dealer, leasing, hire purchase & factoring, can be housed either inside the bank departmentally or through subsidiaries held in the Non-Operating Financial Holding Company (NOFHC). Insurance, stock broking, asset management, asset reconstruction, venture capital funding and infrastructure financing through Infrastructure Development Fund (IDF) sponsored by the bank can only be done outside the bank under the NOFHC, as per RBI’s clarifications.
All lending activities have to be housed within the bank (including housing finance). Commodity broking cannot be held under the NOFHC. Lending activities that are not permitted to a bank, such as promoter financing, loans for purchase of land, would have to be wound up within 18 months from the date of in-principle approval or before commencement of the bank, whichever is earlier. Infrastructure financing through IDF sponsored by the bank will remain outside the bank (but under the NOFHC) while infrastructure financing activities of an infrastructure finance company (IFC) have to be conducted from within the new bank held by the NOFHC.
RBI may consider allowing the new bank to convert the existing non-bank financial company (NBFC) branches into bank branches only in the Tier 2 to six centres. All NBFC branches in Tier 1 centres which would carry out banking business may be permitted to be converted into bank branches and the excess would be adjusted against future entitlements of the new bank within three years from the date of commencement of the bank. Erstwhile branches of NBFC, retained and converted into bank branches, cannot conduct the NBFC’s business.
Impact for NBFCs covered by Nomura:
IDFC – CRR, SLR norms may be easier compared with PSL.
LICHF – LICHF cannot be an NOFHC and will need clarity further on whether the NOFHC that will be created will also include LIC under it (insurance is a regulated financial services activity).
REC & PFC – Lack of forbearance on CRR, SLR and PSL is a negative.
MMFS – Meeting PSL norms is not a challenge.
Shriram Transport – Clarity on the plan for transferring the businesses of Shriram Transport & Shriram City Union Finance to the NOFHC needs to be watched. Also, the group structure is quite complex, and how this will be rationalized in the time frame provided needs to be seen.