Stock Review: Panacea Biotec

 

 

Panacea Biotec is expected to show a steady increase in profitability on the back of a strong order book going forward. Long-term investors can consider buying this stock

 

PANACEA Biotech looks to be on a steady growth path with a couple of large ticket Unicef orders under its belt. Its buyback offer is set to reduce the equity, boosting the earnings per share. The phase of non-operative losses is over for the company, which appears attractive for long-term investors.

Business:

Panacea Biotec is in the business of vaccines and formulations. Of the total revenues, vaccine business contributes to around 70% and the remaining is contributed by formulation business. After a loss making in FY09 — it made losses in three of the four quarters — Panacea Biotec has seen a turnaround. Its net profit on a year-on-year basis jumped around 150% to 32 crore in FY10.

   The company is into development, production and marketing of oral polio vaccines (OPV) and combination vaccines. The company supplies to UNICEF, while selling in the domestic private vaccine market through its joint venture company Chiron Panacea Vaccines. Under the formulations business, the company sells various bio-tech drugs in varied therapeutic areas such as pain management, cardio vascular disorders and diabetes. The company plans to enter and grow in new geographies as Brazil, Philippines and Syria operations commenced from the June 2010 quarter. The share of its international pharmaceutical business grew from 6% to 22% in the first quarter of FY11.

Growth Drivers:

In January 2010, the company received an order of $222 million for EasyFive vaccines from Unicef to be delivered during 2010-12. Additionally, it got a $120 million order for OPV vaccines to be delivered in 2010. Being one of the only two manufacturers of these vaccines in India, the company is likely to bag more such orders from Unicef. For its formulations business also, the company has filed for approvals in various other markets including the US and Germany, where the sales could begin in second half of FY11. The company is simultaneously expanding its capacity with a planned expenditure of around 200 crore in three years to increase the capacity for its various existing products and also for the production of new ones.

Financials:

The company's profits had dwindled after reaching a peak in FY07 dipping into a loss in FY09 due to heavy forex transaction losses. The company was able to push its woes behind and return to profitability in FY10.

   The company's debt at 900 crore is 1.3 times its equity. Out of this, nearly 170 crore represent foreign currency convertible bonds (FCCBs), which come up for redemption in January 2011. It is also running a share buyback scheme to mop up 55.9 lakh equity shares. It has already spent 84.2 crore on buying 43 lakh shares. Considering the capex plan, the share buyback scheme and FCCB redemption, the company will need nearly 270 crore, which it aims at financing through a mix of debt and internal accruals. For the year ended March 2010, the company already carried a cash balance of 90 crore. For the year ended June 2010, the operating margin was around 18.6%. As the contribution from high margin EasyFive vaccines and OPV will grow, the operating margins will improve consequently.

Valuation:

The stock is trading at a price-to-earning multiple of 12.5 times with current market price of 186. The company is expected to post earning per share of 21.4 for FY11, which discounts the current price at 8.9 P/E. Other leading biotech companies such as Biocon and Aurobindo are trading at P/E multiples of 26 and 13.6, respectively.