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Pharmaceuticals
Potential Result Outperformers: Divis, Glenmark
Potential Result Underperformers: Ranbaxy, Aurobindo
Weak domestic business, MTM hits to hurt profitability
We expect 2Q results to be weak for most companies under our coverage as
MTM hits pertaining to forex fluctuation is likely to hurt profit growth. Moreover,
slower domestic formulations business (especially acute therapy segments) is
likely to affect companies with higher exposure to acute therapies. However,
presence/lack of some limited competition products may affect some companies
US business (DRL, Sun Pharma), affecting comparison.
Since much of currency movement happened towards late September, operating
profits for companies are unlikely to be affected significantly. However, uncovered
forex loans (Aurobindo, IPCA, Cadila) could result in high MTM losses. Also,
interest costs may see a rise due to depreciated rupee value. Overall for the
sector, we expect average adjusted profit growth (ex-MTM losses) to be restricted
at 1% even as we expect sales growth of 12%, EBITDA growth of 10% YoY,
mainly on higher depreciation and taxation compared to last year.
Result Expectations – Key Highlights
Dr. Reddy’s
Impact of Allegra OTC launches and generic Fondaparinux would help strong
growth in US generics (up 35%). Russian business to sustain strong growth
driven by increased push in prescription sales. Domestic formulations growth
would still lag industry averages, hence a drag. Base margins launch to sustain at
last quarter levels, despite weak domestic business due to stronger US sales.
Sun Pharma
Consolidation of Taro during 2Q 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. Stable domestic formulations growth would help
modest increase in margins QoQ . We do not expect impact of forex fluctuations
to affect Lupin’s 2Q results as most of it is actively covered through hedges. We
expect EBITDA to grow by 11%, behind sales growth of 15% due to unabsorbed
costs at Indore SEZ.
Divis
We expect strong momentum in topline growth to continue in 2Q, reflecting robust
order book. Moreover, commercialisation of Vizag SEZ in 1Q and gradual pick-up
over time would further improve revenue visibility. We expect EBITDA margins to
sustain at 38-40% levels. We expect Divis to report strong 2Q results with profits
growing 54% YoY, thanks to 40% growth in topline, thanks to higher margins (on
YoY comparison).
Cadila
We expect Cadila to post robust 18% growth in topline, largely driven by strong
domestic formulations growth (16%+) as well as US generics business. Zydus
Wellness would continue to grow at ~20% while the JV’s scale-up would continue
to add positively to profitability. However, reported profits would be suppressed
due to ~Rs400mn MTM losses due to forex fluctuation.
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 healthy growth would be
critical for overall growth. Impact of Sanofi’s licensing income of US$25mn would
mask the MTM losses on forex denominated loans (to the tune of Rs350mn).
However, we expect reduction in gross debt to be marginal, but improving
operating cashflows would help reduce D/E gradually.
Ranbaxy
Lack of niche product (Aricept) in US as well as few new products would limit
growth in US markets. Moreover, with sluggish improvement in RoW markets, we
expect improvement in base business profitability to be gradual. While Project
Viraat would help improve growth in domestic market, impact on profitability
would come with a lag. Ranbaxy has over US$750mn outstanding derivative
contracts along with ~US$400mn forex loans which would result in MTM losses
(Rs2.5bn est). Expectations of forex losses due to rupee depreciation this year
(vs forex gain last year) would further affect comparison on reported profits..
Aurobindo
Impact of ongoing issues with USFDA on Unit VI would continue to put strain on
profitability. While we would see improvement in margins QoQ at 14.4% on better
product mix (lower ARV sales), it would still be short of last year’s margins of
17.7%. We expect 25% decline in EBITDA, despite expectations of 12% growth in
sales as a result of weaker margins. Moreover, MTM losses (Rs1200mn est.) on
forex loans (~US$300mn) would result in marginal profits at reported levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pharmaceuticals
Potential Result Outperformers: Divis, Glenmark
Potential Result Underperformers: Ranbaxy, Aurobindo
Weak domestic business, MTM hits to hurt profitability
We expect 2Q results to be weak for most companies under our coverage as
MTM hits pertaining to forex fluctuation is likely to hurt profit growth. Moreover,
slower domestic formulations business (especially acute therapy segments) is
likely to affect companies with higher exposure to acute therapies. However,
presence/lack of some limited competition products may affect some companies
US business (DRL, Sun Pharma), affecting comparison.
Since much of currency movement happened towards late September, operating
profits for companies are unlikely to be affected significantly. However, uncovered
forex loans (Aurobindo, IPCA, Cadila) could result in high MTM losses. Also,
interest costs may see a rise due to depreciated rupee value. Overall for the
sector, we expect average adjusted profit growth (ex-MTM losses) to be restricted
at 1% even as we expect sales growth of 12%, EBITDA growth of 10% YoY,
mainly on higher depreciation and taxation compared to last year.
Result Expectations – Key Highlights
Dr. Reddy’s
Impact of Allegra OTC launches and generic Fondaparinux would help strong
growth in US generics (up 35%). Russian business to sustain strong growth
driven by increased push in prescription sales. Domestic formulations growth
would still lag industry averages, hence a drag. Base margins launch to sustain at
last quarter levels, despite weak domestic business due to stronger US sales.
Sun Pharma
Consolidation of Taro during 2Q 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. Stable domestic formulations growth would help
modest increase in margins QoQ . We do not expect impact of forex fluctuations
to affect Lupin’s 2Q results as most of it is actively covered through hedges. We
expect EBITDA to grow by 11%, behind sales growth of 15% due to unabsorbed
costs at Indore SEZ.
Divis
We expect strong momentum in topline growth to continue in 2Q, reflecting robust
order book. Moreover, commercialisation of Vizag SEZ in 1Q and gradual pick-up
over time would further improve revenue visibility. We expect EBITDA margins to
sustain at 38-40% levels. We expect Divis to report strong 2Q results with profits
growing 54% YoY, thanks to 40% growth in topline, thanks to higher margins (on
YoY comparison).
Cadila
We expect Cadila to post robust 18% growth in topline, largely driven by strong
domestic formulations growth (16%+) as well as US generics business. Zydus
Wellness would continue to grow at ~20% while the JV’s scale-up would continue
to add positively to profitability. However, reported profits would be suppressed
due to ~Rs400mn MTM losses due to forex fluctuation.
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 healthy growth would be
critical for overall growth. Impact of Sanofi’s licensing income of US$25mn would
mask the MTM losses on forex denominated loans (to the tune of Rs350mn).
However, we expect reduction in gross debt to be marginal, but improving
operating cashflows would help reduce D/E gradually.
Ranbaxy
Lack of niche product (Aricept) in US as well as few new products would limit
growth in US markets. Moreover, with sluggish improvement in RoW markets, we
expect improvement in base business profitability to be gradual. While Project
Viraat would help improve growth in domestic market, impact on profitability
would come with a lag. Ranbaxy has over US$750mn outstanding derivative
contracts along with ~US$400mn forex loans which would result in MTM losses
(Rs2.5bn est). Expectations of forex losses due to rupee depreciation this year
(vs forex gain last year) would further affect comparison on reported profits..
Aurobindo
Impact of ongoing issues with USFDA on Unit VI would continue to put strain on
profitability. While we would see improvement in margins QoQ at 14.4% on better
product mix (lower ARV sales), it would still be short of last year’s margins of
17.7%. We expect 25% decline in EBITDA, despite expectations of 12% growth in
sales as a result of weaker margins. Moreover, MTM losses (Rs1200mn est.) on
forex loans (~US$300mn) would result in marginal profits at reported levels.
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