Pharmaceuticals: Who will surprise in 1QFY12E? We think its SUN :::: Kotak Sec

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Pharmaceuticals
India
Who will surprise in 1QFY12E? We think it’s SUN. We notice maximum variability of
47% in PAT Street estimate for SUN. We believe a positive surprise is most likely for SUN
versus average Street estimate of Rs4.7 bn on account of US launches. We reiterate our
PAT estimate at Rs5.2 bn, 11% higher than Street’s. We don’t make much of PAT
variability for Ranbaxy, Glenmark as it’s likely on account of (1) Aricept sales and (2)
research milestone assumptions, both not part of recurring business. We expect a steady
quarter for KIE pharma universe with strong yoy average sales growth of 21%, though
lower yoy PAT growth of 9% for generics. We expect PAT to decline qoq for Ranbaxy,
DRL, Lupin, Divis and Dishman due to (1) lower US revenues, (2) high base in previous
quarter for CRAMS. Key trends to watch out for, (1) domestic growth, (2) margin trend.
We remain positive on SUN, Cadila, Lupin in generics; Divis, Biocon in CRAMS.
We forecast strong yoy sales growth of 21% for both generics and CRAMS in 1QFY12E
We expect strong yoy sales growth of 21% (see Exhibit 3) across generics and CRAMS companies
led by (1) stronger India sales growth than reported last quarter, (2) higher export growth in rupee
terms due to favorable US$/Re rate, a phenomenon which had hit exports in 1HFY11 resulting in
lower realizations across companies. However, we expect only two companies to report yoy sales
decline—Ranbaxy and Biocon due to lower exclusivity sales in US and Axicorp divesture,
respectively.
Limited scope in margin expansion to result in lower PAT growth in 1QFY12E for generics
We expect yoy PAT growth of 9% for generics despite 21% sales growth on account of (1) limited
scope in margin expansion, (2) non-recurrence of 1QFY11 high-margin product sales in US,
particularly for Ranbaxy and SUN which will report lower EBITDA margin yoy. On the other hand,
we expect a healthy 39% yoy PAT growth for CRAMS on account of (1) strong sales growth,
(2) operating leverage benefits, (3) recovery in business for Divis, Jubilant, and (4) resumption of
yoy sales growth in high-margin research services business for Biocon, which was hit last year.
However, we expect PAT and sales to decline qoq for CRAMS due to high base in 4QFY11.
Positive profit surprise versus Street most likely in SUN Pharma
We notice maximum variability of 47% in PAT estimate for SUN across the Street (see Exhibit 2).
We believe a positive surprise versus Street is most likely for SUN. We notice that average yoy
Street sales growth estimate for SUN is 21%, much lower than management guidance of 28-30%
for FY2012E (see Exhibit 3). In order to meet management sales growth guidance, 9MFY11 sales
growth will have to be 30% despite limited visibility currently on big-ticket US launches (assuming
Prandin as FY2013E launch). We find the Street sales growth estimate of 21% conservative as
(1) 1QFY12E is a key quarter for US launches on account of docetaxel, Imitrex injectible, (2) yoy
sales boost on account of Taro consolidation. We reiterate our PAT estimate at Rs5.2 bn, which is
11% higher than Street’s. We don’t make much of PAT variability for Ranbaxy and Glenmark on
account of (1) Aricept sales and (2) research milestone assumptions, both not part of core business.
Key trends to watch out for, (1) domestic growth, (2) margin trend, (3) interest cost increase
We expect a revival in India sales growth in 1QFY12E which was muted for certain companies in
4QFY11. We believe lower domestic sales growth represents a key downside risk for DRL, Cipla
and Ranbaxy. Key trends to watch out for (see Exhibit 4 for details company-wise) are (1) domestic
growth, (2) margin trend, (3) sales growth in Europe, and (4) increase in interest cost for Jubilant,
DRL and Ranbaxy on account of increase in debt to repay FCCBs and debenture issue in 2011