As per the Dawn news today, pharmaceutical industry has agreed to partially resume the production of Paracetamol after the manufacturers of the local Active Pharmaceutical Ingredients (API) decided to reduce the cost of raw materials by 10%.
To note, country witnessed shortage of Paracetamol as companies had temporarily stopped production due to higher cost of production resulting in lower margins. We believe this development would be Negative for Citi Pharma (CPHL) and Positive for Glaxo Consumer Health Care (GSKCH).
As per channel checks, reduction in API prices is for short period of time and prices of hardship cases including Paracetamol will be increased going forward.
Citi Pharma (CHPL): Currently CPHL sells raw material of Paracetamol at price of Rs2,100/kg which cost around Rs1,850/kg to CPHL, taking gross margins at Rs250/kg (12%) as per management. After the 10% price reductions margins will came down to Rs40/kg (2%) for a short time, as per channel checks.
Along with this, there are news reports that Ministry of Health has moved a summary to Economic Coordination Committee (ECC) of Cabinet for the removal of Custom Duty (CD) and Additional Custom Duty (ACD) on import of API.
As per our discussion with CPHL management and industry players, chances of this happening is very low as government would not approve this summery as it will destroy local industry and build pressure on foreign exchange reserves. Moreover, there are also chances that after reduction in API prices, duties on import of API may not be removed.
We maintain on our Buy stance on CHPL with June-2023 Target Price of Rs47/share, offering a potential total return of 48% (including dividend yield of 6%). Please refer to our detailed report on CPHL titled Initiating Coverage with a ‘Buy’; Expansion & Diversification to drive earnings dated Aug 19, 2022 for more details.
Glaxo Consumer Health Care (GSKCH): As per channel checks, current MRP of Panadol is Rs340 per 200 tab box compared to their cost of Rs320 per 20 tab box, taking margins to just Rs20/box. However, recent decision of 10% reduction in API cost will increase the gross margin of the company. To note, GSKCH holds 80% of market share of Paracetamol.
Courtesy – Topline Securities