Morning Briefing for January 16, 2013 – Standard Capital

Karachi, January 16, 2013 (PPI-OT): The Searle Company: Re-rating needed ~ presents the case of 14% earnings growth – BUY

Synopsis

Extending Standard Capital’s coverage in relation to lowest PE companies, Standard Capital see SEARL is one which is price play and hence relegated at FY13 PE of 3.7x and future outlook of the company looks good.

According to Standard Capital, the company presents possible ‘earnings growth’ option of 14% in FY13 in line with overall corporate sector profitability (hence presents the case of re-rating).

SEARL is glowing with cash cow brands like Pediteral, Rotec ,Hydrillin and Lumark which could be witnessed by consistent topline growth in last 5-years with margins also continuously on the increasing side. Though spate of financial charges has spoiled the bottom line growth to a great degree. However, growth in bottom line of some other FMCGs and phama companies has rejuvenated Standard Capital’s belief that SEARL also presents value investment option.

Nevertheless, growth in profits is countered by compound growth of 20% over 5 years reflecting the price play in several key flag products. Earlier, Standard Capital also reported Standard Capital’s expectation of price increase in Ventek Tablets (which are used for the prophylaxis and chronic treatment of asthma) to increase from Rs252/packet(Rs18/tablet) to Rs310/packet(Rs22/tablet). This will be reflected in upcoming results.

It should be noted that the prices of medicines as per WPI index grew by 22% over Dec 2011-12 period and 11% growth over the same period as per CPI.

Triggers: ORS sales and inauguration of new plant

• It is also worth discussing the fact that “Dehydration” caused by diarrhoea is a major cause of mortality among children and Oral Rehydration Salts (ORS) are used for the prevention and treatment. According to survey, the overall percentage of children who have suffered from diarrhoea is increased from 10% in FY09 to 11% in FY11. Baluchistan and Punjab have shown increase in diarrhoea cases while Sindh and Khyber Pakhtunkhwa have same trend. Mianwali with 26%, Sanghar with 33%, Bannu with 33% and Harnai with 65% are the most affected districts in Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan respectively. SEARL specializes in the production of ORS under the brand name called Peditral which driving revenue both from demand increase and price inflation. As reported earlier a Rs10/packet of ORS increased to Rs25/packet over 6-8 months period.

• Moreover, SEARL also inaugurated its new high-tech manufacturing plant in the city of Lahore, which is the second manufacturing unit after Karachi. This would allow Searle to benefit from economies of scale and also allow increasing market share.

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