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Pharma Q2FY11 Results Review |
n Emkay Pharma universe grew by 13.8% (est. of 11.2%), driven by 51% and 26% each in Panacea Biotec, Aurobindo and Sun Pharma. Most of the companies in domestic pharma market reported robust growth.
n OPM contracted by 46bps (EBIDTA growth of 11.4%) to 21.6% (est. of 21.5%). Sun Pharma (34% vs. est. of 29%) & Panacea Biotec (22% vs. est. of 17.2%) surprised positively while Divi’s (33.9% vs. est. of 40.4%) & Dishman (17.4% vs. est. of 23) surprised negatively. During the quarter, most of the companies reported higher gross margins driven by improved product mix and higher contribution of domestic formulation business. However higher employee cost and SGA cost on account of ramp-up in sales force impacted operating margins.
n Despite higher depreciation cost (up 26%), APAT grew by 14% (est. of 6%) because of lower interest cost (down 15%).
n CRAMS companies again disappointed in this quarter. We expect gradual recovery in second half and strong growth in FY12E, driven by a) increased outsourcing by global players post consolidation phase and b) lower base effect
n Though the valuations of pharma sector has moved up (trading 8-10% premium to 5 years average multiple) but they are not yet in stretched territory
n While we remain positive on the sector (as fundamentals remain strong), we believe there is less room for error after the recent outperformance. Post strong outperformance, we believe that it pays to be more stock specific now rather than having a bullish stand on entire pharma space
n In the large cap - DRL, Lupin and Cadila are our preferred bet.
n In mid cap - we continue to like Torrent, Aurobindo and Ipca Labs.
n In the CRAMS space - we prefer Jubilant LifeSciences over other companies because of valuation comfort
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