Equity Analysis /
Bangladesh

Three reasons to invest in Bangladesh pharmaceuticals now

    Tanay Kumar Roy
    Tanay Kumar Roy

    Research Analyst

    IDLC Securities
    11 September 2019
    Published by

    1) Increase in drug prices; we upgrade RENATA from Hold to Buy. Our survey on retail drug prices suggests that the pharmaceutical companies of our coverage increased prices of some of their top brands over the past two months. Out of the 95 brands we surveyed, four companies increased prices of their ten brands. The price hike is concentrated on anti-ulcerant, anti-biotic, anti-pyretic, and respiratory products. We believe that RENATA offers upside potential for this price hike since it increased the prices of three top-selling brands, weighing c36% of sales, by 22% on an average. We expect c500bps sustainable increase in RENATA’s EBITDA margin. Likewise, SQUARE has increased the prices of three brands, weighing roughly 15% of total sales, by c14% on an average. Therefore, we expect a 100bps expansion in EBITDA margin for SQUARE as well. For BXPHAR and ACMELAB, the magnitude of the impact is too low to consider. Please note that we expect very low demand elasticity for the recent price hike since these are very popular brands and some were sold at comparatively cheaper to their competitive brands. Also, our expectation of margin expansion incorporates an adjustment for additional VAT, calculated under the new methodology, suggesting that the companies have to pay the extra 2.35% VAT by themselves unless regulator permits to increase product prices. So, we may see a further increase in drug prices as the companies may attempt to pass on the impact of this additional VAT to the customers.

    2) Good quarters await for pharmaceutical companies. We expect a turnaround for SQUARE. We expect the pharmaceutical companies to generate c18% and c22% yoy bottom-line growth in Q4 FY19 (Apr-Jun 2019) and Q1 FY20 (Jul-Sep 2019) period respectively driven by stable growth in domestic demand and price hike. We believe the scenario will be better for SQUARE as the company is likely to emphasize sales and marketing activities to retain market share amid competition. We expect 13.3% and 14.5% top-line growth in Q4 FY19 and Q1 FY20 for SQUARE, resulting in 17.0% and 18.3% earnings growth respectively. RENATA, on the other hand, is expected to generate 48.0% bottom-line growth in Q1 FY20 driven by margin expansion. For FY20, we expect SQUARE and RENATA to generate c20% and c48% NPAT growth respectively. We expect double-digit earnings growth for BXPHAR and ACMELAB as well.

    3) Valuations are cheap, especially for BXPHAR. We have updated our TP for our coverage for June 2020 (from December 2019). 

    • SQUARE – we maintain Buy (ETR 43.2%) with TP BDT348 (+8.4% revision) including 100bps margin expansion. 
    • RENATA – we upgrade from Hold to Buy (ETR 22.3%) with TP BDT1,534 (+32.7% revision) including 500bps margin expansion. 
    • BXPHAR – we maintain Buy (ETR 45.5%) with TP BDT119 (+9.2% revision). 
    • ACMELAB – we maintain Buy (ETR 44.4%) with TP BDT100 (-6.2% revision) for suboptimal capital allocation and push-sales based growth strategy.

    The pharmaceutical stocks of our coverage are trading at very cheap multiples compared to their expected earnings growth. BXPHAR and SQUARE, especially, appear cheap as they are trading at 10.0x and 12.9x FY20E forward PE respectively compared to expected 3Y earnings CAGR of c18% and c16% respectively.