Otsuka Pakistan Limited

Otsuka Pakistan Limited (PSX: OTSU) was established in 1988 as a public limited company. It began commercial production of intravenous solutions a year later in 1989. It is also into trading pharmaceutical products, nutritional foods and medical equipment.

Otsuka Pakistan Limited is an indirect subsidiary of Otsuka Pharmaceutical Company Limited, Japan.

Shareholding pattern

As at June 30, 2020, nearly 68 percent shares of the company were held by the associated companies, undertakings and related parties. Of this, 45 percent shares are with M/s. Otsuka Pharmaceutical Company Limited. Over 17 percent shares are with the local general public followed by 10 percent held under the “others” category. The directors, CEO, their spouses and minor children own over 3 percent shares, that are mostly concentrated with Mr. Mehtabuddin Feroz, one of the directors. The remaining about 1 percent shares is with the rest of the shareholder categories.

Historical operational performance

The company has mostly seen a growing topline with the exception of FY13 and FY14. The profit margins, however, have been fluctuating dipping in FY14 and again in FY19 before rising again.

In FY17, revenue grew by almost 18 percent- one of the highest growth rates seen over the years. Some of this growth was attributed to a price increase as the price was increased for only some of the products. On the other hand, cost of production decreased remarkably, close to 73 percent of revenue, down from almost 83 percent in FY16. This brought gross margin up to 27 percent. This also trickled down to the net margin as other income increased due to a net exchange gain, whereas other expenses significantly reduced year on year due to the elimination of net exchange loss that was seen in FY16 at Rs 119 million.

Revenue growth was limited to single digits at 2 percent during FY18. This was attributed to a situation of over supply and intense competition in the IV sector. Cost of production further reduced to make 69 percent of revenue that increased took gross margin up to over 30 percent. However, this did not translate into a higher bottomline due to an increase in operating expenses as well as other expenses that was driven by a net exchange loss. This was due to a currency devaluation against the US dollar. Moreover, contribution by other income also reduced, due to the absence of exchange gain, that dented profitability. During the year, the company also made two installments of loan obtained from Otsuka Pharmaceutical Factory, Inc., Japan. This led to a reduction in finance expense, but it was offset by the rise in bank rate in the last two quarters. Thus, net margin was lower at 3.5 percent.

Revenue increased marginally during FY19, by almost 1 percent, as competition and over supply continued during the year. However, it was the cost of production that dampened profitability immensely. It escalated to almost 79 percent of revenue, up from 69 percent in FY18. This was attributed to the currency devaluation since the pharmaceutical sector is an import dependent sector and faces the exchange rate risk. With PKR/USD exchange rate parity rising from 121.5 to 160.05, gross margin for the company shrunk to 21 percent. This devaluation also affected other expenses as net exchange loss alone, rose to Rs 193.7 million. the inflationary pressures also raised the cost of utilities and operating expenses; thereby the company incurred an operating loss of Rs 128 million. This was aggravated due to a rise in finance expense due to rise in interest rates. Thus, net margin was recorded at a negative 9 percent.

In FY20 the company saw its revenue rising by 18 percent on the back of increase in sales of Clinical Nutrition (CN) products. Moreover, the company was able to “materialize impact of last year price increase during current year sales”. Cost of production, although increased in value terms year on year, it reduced as a percentage of revenue, allowing gross margins to improve to nearly 27 percent. Operating expenses also saw a decline as a share in revenue along with the elimination of net exchange loss. Therefore, the company posted a profit of Rs 91 million for the year.

Quarterly results and future outlook

The first quarter of FY21 saw revenue higher by 14 percent year on year as business activities resumed after the lock down that was placed in the event of the Covid-19 pandemic. Net margin was also higher due to a reduction in finance expense. The latter was due to the government reducing interest rates in order to support economic activities during the pandemic.

The second quarter also saw an improvement in sales year on year, although they were lower than the first quarter of FY21. Despite lower revenue quarter on quarter, 2QFY21 saw higher profitability owing to lower production cost and support coming from other income. The third quarter was largely supported by other income, in addition to higher sales revenue quarter on quarter, as well as same period last year. While gross margin was lower than 2QFY21, the bottomline was supported by other income that was recorded at Rs 70 million for 3QFY21 alone.

While the stable exchange rate can bring some certainty and profitability for the company till the end of FY21, the ongoing third wave of Covid-19, the oncoming budget, and oil prices can have an adverse impact on the company’s financials.