CRISIL retains valuation grade of 4/5 to Panacea Biotec

Panacea Biotec Ltd’s (Panacea’s) Q3FY12 results were significantly below CRISIL Research’s expectations. Revenue declined 47% y-o-y to Rs 1,552 mn, and the company reported a loss of Rs 288 mn and Rs 717 mn at the EBITDA and PAT levels respectively. The decline was largely from loss in sale of pentavalent vaccine EasyFive due to its delisting by WHO and lower polio vaccine sales. We believe these headwinds are short term since the delisting is not because of product quality but due to non-compliance of quality management processes. The company is taking corrective action to upgrade its processes and we expect pentavalent sales to WHO to be resumed in FY13. We will provide more visibility on the same post our interaction with the management. While we maintain our fundamental grade of 3/5, we may revise our estimates downwards.

Q3FY12 result analysis
• Revenues declined by 47% y-o-y (down 32% q-o-q) to Rs 1,552 mn mainly due to loss in sale of pentavalent vaccines following WHO’s delisting of the product. Sale of polio vaccine was also lower because of lower off take by the Indian agency RITES. However, formulations sales grew 17% y-o-y, in line with our estimates.

• EBITDA margin declined q-o-q to negative 18.6% from 0.9% in Q2FY11. We believe that it was because of: 1) loss in sale of significantly highmargin pentavalent vaccine EasyFive in Q3FY12, 2) the company was earlier planning to clear EasyFive inventory. We believe that the company would have cleared the inventory but at low realisations, hurting margins. However, we may provide more clarity on the same post our interaction with the management.

• The company reported loss of Rs 717 mn in Q3FY12 primarily due to lower operating margins and foreign exchange loss of Rs 108 mn.

Valuation: Current market price has upside
We continue to use the discounted cash flow method to value Panacea at Rs 100 per share. At the current market price of Rs 89, we retain our valuation grade of 4/5.

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