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PHARMACEUTICALS
Revenue growth to remain strong, but status quo in profitability: Q3FY11 Result Preview: Edelweiss
Key highlights of the sector during the quarter
We expect growth momentum to continue across coverage stocks led by robust
growth in US generics from launch of key products during the quarter. We expect
moderation in growth for domestic formulations (vis-a-vis more than 20% growth
during H1FY11), while ROW markets (LATAM, Russia etc.) are likely to remain
strong. We expect growth to pick up in Europe. Margin outlook remains stable
from Q2FY11, while lower milestone/tech income will impact Y-o-Y performance.
The closure of key acquisitions or deals is likely to have one-time impact on
margins and revenue growth for some players (Piramal Healthcare and Sun
Pharma).
Result expectations for the sector and stocks under coverage
We expect absolute earnings (Y-o-Y) to remain stable, despite higher revenue
growth, due to higher base of milestone income (Cipla, Torrent Pharma and
Aurobindo), new capacity additions driving higher fixed costs and lower tax rate in
Q3FY10. Sun Pharma (SUNP) is likely to have one-time impact on sales and
margins from full integration of Taro (lower EBITDA margin). Ex-Taro, base
business growth is likely to decline Q-o-Q from loss of exclusivity sales (Eloxatin).
This will be partly offset by incrementally higher sales from Effexor XR and
Rivastigmine. Lupin (LPC) will continue to post strong growth from higher sales in
domestic formulations and seasonally strong sales form Suprax. Aurobindo
Pharma (ARBP) will see ramp up in revenue post SEZ commercialization, which
will positively impact core margins. Torrent’s (TRP) export formulation growth is
likely to remain strong with recovery in US generics from higher capacity and new
product introductions. We do not include impact from forex in our estimates, but
appreciation of INR to USD and EUR could be a risk, given the large contribution
of exports to overall revenues.
Outlook for the next 12 months; Maintain positive outlook
We maintain positive outlook with emerging opportunities over the medium term.
Domestic formulations business is expected to deliver strong double digit growth,
while the US formulations business will benefit from strong product pipeline
offering niche opportunities for large Indian players. Sales from strategic
partnership deals are expected to ramp up for specific players (for e.g., Pfizer with
Aurobindo and Strides, GSK with Dr. Reddy’s) while new deals (Astrazeneca with
Torrent) will be accretive to sales over the medium term and will further add
upside to revenue outlook. ROW markets are expected to post sharp growth, with
Russia reverting to growth. The appreciating INR trend will play an important role
given the large contribution of exports to overall revenues. We believe FY13 will
be critical for most companies as higher scale of operations and forward
valuations will price in benefits from patent expiries, expected launch of niche
products in US generics, commencement of capacities and full scale of operations
from strategic partnerships by end FY12.
Top picks
Lupin, Aurobindo Pharma, Torrent Pharma, Apollo Hospitals.
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