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Pharmaceuticals
Potential result outperformers: Divis, Lupin
Potential result underperformers: GSK, Ranbaxy
Mixed quarter; High base tempers expectations
We expect our coverage universe to report mixed bag of results this quarter. This
would most likely be affected by high base of last year (for Ranbaxy, Cadila) as
well as some exceptional items (Piramal, Aurobindo). Domestic formulations to
sustain 15%+ growth rates for most players driven by recent ramp up in
salesforce. Recent spate of ANDA approvals would increase new launches
momentum, aiding US revenues for large players. Stability in forex rates would
limit forex gains/losses except on realized contracts. Overall for the sector
(excluding Ranbaxy, Piramal), we expect average profit growth of 13% led by
sales growth of 17% YoY, EBITDA growth of 7% YoY for our coverage universe
primarily led by Dr Reddy’s and Divis.
Result Expectations – Key Highlights
Dr. Reddy’s. Lack of exclusivity sales in the quarter would affect QoQ
growth in US business. Russian business to sustain strong growth driven by
increased push in prescription sales. Domestic formulations growth to show
pick up from last quarter, still is expected to lag industry average on YoY
growth. Base margins (adjusted for Allegra D24 exclusivity) launch to sustain
at last quarter levels.
Sun Pharma. Consolidation of Taro during 1Q would hinder YoY
comparability. However, we expect Sun’s base business to remain strong on
the back of recent new launches in the domestic market. Lack of limited
competition product Eloxatin sales would however result in lower profitability,
somewhat salvaged by launch of generic Taxotere. We expect Taro’s
financials to reflect improvement in margins post Sun’s takeover, in line with
last two quarters.
Lupin. We expect strong US generic business aided by recent approvals
and RoW markets to sustain strong march. Pick up in Antara sales would be
critical for revival in US branded business. Improved business mix and stable
forex rates would lead to margin expansion on QoQ basis as we expect
EBITDA to grow by 15%, behind sales growth of 21% due to unabsorbed
costs at Indore SEZ. PAT growth to be stronger than EBITDA on higher other
income and lower tax rates.
Divis. We expect strong momentum in topline growth to continue in 1Q,
reflecting business recovery. Moreover, commercialisation of Vizag SEZ
during the quarter further improves revenue visibility. Carotenoid business
remains on track to double sales this fiscal on new orders. We expect
EBITDA margins to sustain at 38-40% levels. We expect Divis to report
strong 1Q results with profits growing 51% YoY, thanks to 48% growth in
topline.
Cadila. We expect Cadila to post robust 18% growth in topline, largely
driven by strong domestic formulations growth (18%+) as well as US
generics business. Zydus Wellness would continue to grow strongly at 25-
30% while the JV’s scale-up would continue to add positively to profitability.
However profit growth would be restricted due to lack of one-time licensing
income of ~Rs600mn last year.
Glenmark. We expect commercialisation of ANDAs approved over last 3
quarters to show traction in US generic sales. While domestic formulations
would continue to outpace industry growth, RoW/Latam market sustaining
rebound would be key to watch out for. However, we expect reduction in
gross debt to be marginal, but improving operating cashflows would help
reduce D/E gradually.
Ranbaxy. We believe lack of exclusivity sales of Aricept would affect
profitability and growth in comparison to previous quarter (1QCY11).
Moreover, with sluggish improvement in RoW markets, we expect
improvement in base business profitability to be gradual. Signs of success in
domestic formulations would be evident from Project Viraat rollout even as
near term cost pressures would not reflect true profitability. We believe
absence of Valtrex exclusivity and high forex gains last year would hinder
YoY comparison.
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