>MERCK

On recovery path


Merck’s results for Q2CY12 were better than our expectations. The company reported 16%YoY growth in revenues, 40bps improvement in EBIDTA margin and 14%YoY growth in net profit. The growth was driven by the chemical business (32% of revenues), which grew by 23%YoY. However, the pharma business (68% of revenues) grew by 13%YoY. Merck is a debt-free company with cash/share of Rs85. We expect the growth momentum to be maintained due to strong growth in the chemical business. We have a Buy rating for the scrip with a target price of Rs687 (based on 14x CY13E EPS of Rs49.1).
 
■ Strong growth in chemical business: Merck reported 16% YoY growth in revenues from Rs1.60bn to Rs1.85bn due to strong growth in the chemical business. The company’s pharma business (68% of revenues) grew by 13%YoY from Rs1.14bn to Rs1.28bn. The growth was lower than the market growth of ~15%. The company’s chemical business (32% of revenues) grew by 23%YoY from Rs496mn to Rs610mn.


■ Margin improvement: Merck’s EBIDTA margin improved by 40bps YoY from 14.6% to 15.0% despite sharp rise in the material cost. On a QoQ basis, the margin improvement was 380bps. The company’s material cost increased from 42.0% to 44.7% of revenues due to the rise in imported raw material cost with the depreciating rupee. Merck’s personnel cost declined by 60bps from 13.1% to 12.5% due to higher sales growth. Other expenses declined by 240bps from 30.3% to 27.9% of revenues.



■ Strong growth in chemical business: Merck reported strong growth of 23% in the chemical segment. The company manufactures vitamin E, Oxynex ST, thiamine disulphide (TDS) and guaiazulene at its Goa facility and exports some of these products to its parent company.
 
■ Major brands growing slowly: As per IMS MAT-May’12 data, Merck’s major brand Neurobion Forte grew by 6.6%, Evion 10.1% and Polybion SF (4.3)%. However, its OTC brand Nasivion grew by 23.3%.   

■ Valuations: We expect EPS of Rs41.1 for CY12 and Rs49.1 for CY13. At the CMP of Rs606, the stock trades at 14.7x CY12 and 12.3x CY13 earnings. We have a Buy rating for the scrip with a target price of Rs687 (based on 14x CY14E EPS of Rs49.1) with 13.4% upside over the CMP.


RISH TRADER