AGP Limited (AGP) is one of the alpha stocks we recommended in our Strategy Report 2025 dated Nov 16, 2024. Our Dec-2025 Target Price of Rs210/share offers a potential total return of 31%. The Pharma sector has rallied 205% in 2024TD, significantly outperforming the KSE-100 Index return of 77% during the same period. AGP has returned 142% YTD within the listed pharmaceutical space, outperforming the broader market’s return while underperforming the sector. We believe the stock still has significant potential for further growth.
§ Our liking for AGP mainly stems from (1) the deregulation of non-essential medicines that will drive margins from the Dec 2024 and Mar 2025 quarters, (2) the benefit from a substantial fall in interest rates, and (3) the launch of new products to continue revenue growth momentum.
§ Deregulation of non-essential drugs to drive gross margins: The benefit of deregulation of non-essential drug prices is not fully visible in companies dominated by higher non-essential drugs in their revenue mix like AGP and SEARL. In our view and based on the guidance from management, the actual improvement in margins will be partially visible in the Dec 2024 quarter, while more than 90% of the impact will be visible by Mar 2025. Around 70% of AGP’s portfolio comprises non-essential products on a standalone basis and 50% on a consolidated basis. Based on this, we expect the company to post gross margins of 56.1% and 57.5% in 2025 and 2026, respectively, from 55.7% in 2024. This will continue to keep the company at the top of the industry in terms of GP margins.
§ Fall in interest rate to support bottom line: The company’s debt-to-equity ratio stands at 0.93x as of Sep 2024 with total debt of Rs12.3bn. The ongoing monetary easing cycle will benefit AGP as a 900bps reduction in the policy rate is expected to generate annualized after-tax savings of Rs2.4/share (19% of 2025 earnings).
§ Launch of new products to add further upside to growth: AGP has been actively pursuing the introduction of new medicines to expand and diversify its product offerings. With this recent deregulation, we believe AGP will be able to launch new products that were not commercially viable earlier. Based on our channel checks, the company may launch 7-8 new products in 2025 with an estimated impact of Rs700-800mn to 2025 and 2026 revenues, helping the company achieve a revenue CAGR of 12% from 2025-2027.
§ Earnings to grow at CAGR of 35% from 2025-2027: After incorporating the impact of the deregulation of non-essential products, along with a fall in interest rates, AGP is expected to post a profit of Rs3.6bn (EPS: Rs13/share) in 2025 and Rs4.6bn (EPS: Rs16.6/share) in 2026.
§ Valuation: AGP is currently trading at Rs165/share, offering a potential total upside of 31% to our Target Price of Rs210 per share (including dividend yield of 4%).
§ We have valued AGP using a blend of the discounted cash flow (DCF) method and AGP’s historical P/E multiple since its listing on the PSX in 2016.
§ We have used a Risk-free rate of 12.2% and a Risk premium of 6% to arrive at an out-of-equity of 18.2%.
§ Key risk to our investment thesis includes (1) higher than expected rupee devaluation, (2) higher than expected inflation, (3) lower than expected demand and (4) any regulatory change, i.e. reversal of recently introduced deregulation of non-essential drugs.
§ Upside Case: AGP has historically been very active in pursuing inorganic growth strategies, including M&A activities. Any surprises on this front in 2025 or beyond will be incorporated accordingly.
Courtesy – Topline Pakistan Research
