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With the increasing expectation of lower global GDP growth, we analyse the potential impact on
earnings and valuations. Under our bear-case scenario, we believe FY12F/13F earnings could be
1%/3% lower (hit by revenue exposure to Europe) and valuations could fall 11-13.5% from our
current estimates.
Background to our analysis
Many commentators are beginning to suggest that Europe and the US will tip into recession later
this year and into next year. We believe that Indian Pharma companies with higher exposure to
domestic formulations (domestic growth story) and US generics (low cost and likely to benefit
from the ongoing patent cliff) would be better placed than companies with high exposure in
Europe, which could see some downside.
Valuation approach: current and bear case
In general, we value India Pharma companies by assigning a target PE multiple based on our
estimate of the sector average multiple and then assigning a premium/discount depending on our
view of the company’s growth prospects and the quality of its business mix and management. In
this report, we illustrate how we might adjust our earnings forecasts and reduce our target PE
multiples, by 10%, to derive our bear-case valuations.
Earnings and valuations impact
Our bear case reflects FY12F/13F earnings that are 1-3% lower than our current estimates –
assuming slower revenue growth in companies exposed to Europe (revenue contributions
ranging from 3.2-14.6% in our coverage universe). Lowering our target PE multiples by 10%
would lead to us lowering our valuations by 11-13.5%. We estimate Ranbaxy and Glenmark
would be most affected; Sun Pharma, Cipla, Dr Reddys and Lupin would be the least affected.
Balance sheet vulnerability
As of end-FY11, Glenmark had the weakest balance sheet among the India Pharma companies
we cover, with net D/E of 0.94x; Sun Pharma had the strongest with net D/E of -0.2x; other
peers we cover also had relatively strong balance sheets with net D/Es of 0.19-0.39x.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
With the increasing expectation of lower global GDP growth, we analyse the potential impact on
earnings and valuations. Under our bear-case scenario, we believe FY12F/13F earnings could be
1%/3% lower (hit by revenue exposure to Europe) and valuations could fall 11-13.5% from our
current estimates.
Background to our analysis
Many commentators are beginning to suggest that Europe and the US will tip into recession later
this year and into next year. We believe that Indian Pharma companies with higher exposure to
domestic formulations (domestic growth story) and US generics (low cost and likely to benefit
from the ongoing patent cliff) would be better placed than companies with high exposure in
Europe, which could see some downside.
Valuation approach: current and bear case
In general, we value India Pharma companies by assigning a target PE multiple based on our
estimate of the sector average multiple and then assigning a premium/discount depending on our
view of the company’s growth prospects and the quality of its business mix and management. In
this report, we illustrate how we might adjust our earnings forecasts and reduce our target PE
multiples, by 10%, to derive our bear-case valuations.
Earnings and valuations impact
Our bear case reflects FY12F/13F earnings that are 1-3% lower than our current estimates –
assuming slower revenue growth in companies exposed to Europe (revenue contributions
ranging from 3.2-14.6% in our coverage universe). Lowering our target PE multiples by 10%
would lead to us lowering our valuations by 11-13.5%. We estimate Ranbaxy and Glenmark
would be most affected; Sun Pharma, Cipla, Dr Reddys and Lupin would be the least affected.
Balance sheet vulnerability
As of end-FY11, Glenmark had the weakest balance sheet among the India Pharma companies
we cover, with net D/E of 0.94x; Sun Pharma had the strongest with net D/E of -0.2x; other
peers we cover also had relatively strong balance sheets with net D/Es of 0.19-0.39x.
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