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Despite being considered as defensive, the BSE Healthcare Index has declined 10.9% (vs. 8.5%
of Sensex) over the last 1M due to disappointing 3Q results. We expect limited downside for
Indian Pharma sector given its reasonable valuations backed by visibility on future earnings. Reiterate
Buy on Lupin and Glenmark.
Disappointment in 3Q earnings has led to recent stock price correction
BSE Healthcare Index has declined 10.9% in last 1 month vs Sensex decline of 8.5%. While
Indian Pharma is considered defensive, this excessive sell-off is largely due to
disappointment in 3Q earnings on the back of its earlier expensive valuations, in our view.
The key disappointments in 3Q interims of India Pharma companies were -
Muted sales growth in US - Apart from ongoing pricing pressure in US markets, the muted
growth of Indian Pharma companies in US was also partly due to reduction in inventory levels
by distributors whose fiscal year ended last quarter. Caraco (Sun pharma's US subsidiary)
reported sales decline of 22% yoy. The US business revenues of other companies was muted
- Lupin (10%), Glenmark (8%) while Cipla's export formulation business (does not give
country split) growth was also only 12%. Dr Reddy's witnessed an exception yoy growth of
60% due to presence of one-off limited competition products - excluding one-offs, we estimate
its core US business grew by only 5%.
Lower than expected growth in domestic formulations - Apart from Sun Pharma and
Glenmark (which grew by 20% yoy and 30% yoy) - most Indian Pharma companies have
reported lower than their historical high growth performance with growth ranging from 11% to
16% (Cipla-11%, Dr Reddys - 14%, Cadila -16%, Lupin -16% ). This may be due to increasing
competition (as most companies are increasing their sales force) as well as by a robust
performance by the MNC Pharma which has grown robustly (Abbott - 33%, Pfizer- 21%,
Glaxo-14%)
Pressure on EBITDA margins - The cost base (Staff, SG&A and other overheads) has
increased more than proportionately compared to revenues - the benefits of which would be
seen in next couple of quarters.eg - Sun Pharma- Taro consolidation, Dr Reddy's - on
litigation costs/ increase in sales force in Russia and India, Lupin - increase in sales force for
its branded products, Cipla- due to commssioning of its Indore facility, etc
However, lower tax-rate gives some cushion - While tax rate for Sun Pharma increased due
to Taro consolidation (3-5% in past to 13% in 3Q) and Glenmark was stabel at 19-20%, tax
rates were lower by 200bps qoq in case of Cipla, 500bps for Dr Reddy and 150bps for Lupin.
Expect limited downside from current levels in the sector; Buy Lupin & Glenmark
India Pharma sector was trading at historically high PE band of 22-23x FY12F EPS in the
recent past which has now corrected to 20.8x. We believe that this recent correction coupled
with reasonable visibility on future earnings, positions India Pharma sector in a sweet spot.
We re-iterate our Buy on Lupin and Glenmark on attractive valuations. Post the 14%, 8% and
14% decline in Sun Pharma, Dr Reddys and Ranbaxy respectively, these stocks are now
trading closer to our target price. We therefore see little downside from current levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Despite being considered as defensive, the BSE Healthcare Index has declined 10.9% (vs. 8.5%
of Sensex) over the last 1M due to disappointing 3Q results. We expect limited downside for
Indian Pharma sector given its reasonable valuations backed by visibility on future earnings. Reiterate
Buy on Lupin and Glenmark.
Disappointment in 3Q earnings has led to recent stock price correction
BSE Healthcare Index has declined 10.9% in last 1 month vs Sensex decline of 8.5%. While
Indian Pharma is considered defensive, this excessive sell-off is largely due to
disappointment in 3Q earnings on the back of its earlier expensive valuations, in our view.
The key disappointments in 3Q interims of India Pharma companies were -
Muted sales growth in US - Apart from ongoing pricing pressure in US markets, the muted
growth of Indian Pharma companies in US was also partly due to reduction in inventory levels
by distributors whose fiscal year ended last quarter. Caraco (Sun pharma's US subsidiary)
reported sales decline of 22% yoy. The US business revenues of other companies was muted
- Lupin (10%), Glenmark (8%) while Cipla's export formulation business (does not give
country split) growth was also only 12%. Dr Reddy's witnessed an exception yoy growth of
60% due to presence of one-off limited competition products - excluding one-offs, we estimate
its core US business grew by only 5%.
Lower than expected growth in domestic formulations - Apart from Sun Pharma and
Glenmark (which grew by 20% yoy and 30% yoy) - most Indian Pharma companies have
reported lower than their historical high growth performance with growth ranging from 11% to
16% (Cipla-11%, Dr Reddys - 14%, Cadila -16%, Lupin -16% ). This may be due to increasing
competition (as most companies are increasing their sales force) as well as by a robust
performance by the MNC Pharma which has grown robustly (Abbott - 33%, Pfizer- 21%,
Glaxo-14%)
Pressure on EBITDA margins - The cost base (Staff, SG&A and other overheads) has
increased more than proportionately compared to revenues - the benefits of which would be
seen in next couple of quarters.eg - Sun Pharma- Taro consolidation, Dr Reddy's - on
litigation costs/ increase in sales force in Russia and India, Lupin - increase in sales force for
its branded products, Cipla- due to commssioning of its Indore facility, etc
However, lower tax-rate gives some cushion - While tax rate for Sun Pharma increased due
to Taro consolidation (3-5% in past to 13% in 3Q) and Glenmark was stabel at 19-20%, tax
rates were lower by 200bps qoq in case of Cipla, 500bps for Dr Reddy and 150bps for Lupin.
Expect limited downside from current levels in the sector; Buy Lupin & Glenmark
India Pharma sector was trading at historically high PE band of 22-23x FY12F EPS in the
recent past which has now corrected to 20.8x. We believe that this recent correction coupled
with reasonable visibility on future earnings, positions India Pharma sector in a sweet spot.
We re-iterate our Buy on Lupin and Glenmark on attractive valuations. Post the 14%, 8% and
14% decline in Sun Pharma, Dr Reddys and Ranbaxy respectively, these stocks are now
trading closer to our target price. We therefore see little downside from current levels.
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