Pharmaceuticals - Q3FY12 Result Preview - Marching ahead in turbulent times:: Edelweiss,

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We expect bumper earnings growth in Q3FY12 (43% YoY) led by strong uptick in the domestic market, favourable currency movement and niche launches in US (Lipitor/Zyprexa). Margins (ex-RBXY/ARBP) are expected to improve by 230bps YoY. We see strong traction in Sun Pharma (SUNP), Dr. Reddy’s (DRRD) and Cipla among large caps and Torrent in the mid-cap space. Aurobindo (ARBP)/Cadila (CDH) is expected to relatively underperform, though QoQ ARBP should report improved performance. We raise coverage earnings by 1-4% for FY13E to factor in revised conversion rate of INR50 (earlier INR46) offset by lower DEPB benefits. We upgrade SUNP from ‘HOLD’ to ‘BUY’.

Strong domestic market recovery, firm US sales to boost growth

We expect revenue growth of 23% YoY led by strong recovery in domestic market and firm sales in US generics. Q3FY12 kicks-off blockbuster patent cliff opportunity with Lipitor, Caduet and Zyprexa contributing to higher growth and profitability. We estimate USD55bn patent opportunity over the next 18 months which will drive strong earnings momentum for Indian generics. We expect margins to increase by 328bps YoY (230bps ex-RBXY/ARBP). ARBP’s margin is likely to recover QoQ from higher revenue growth; however, YoY it will remain subdued due to operating issues and higher cost base.

Sun Pharma and Dr. Reddy’s on firm footing

We expect SUNP and DRRD to report strong earnings growth led by higher realizations and niche product launches in US. DRRD’s growth in US at 96% YoY is led by the launch of Zyprexa and full quarter impact of Fondaparinux. RBXY’s profits will increase sharply on launch of Lipitor and Caduet. Lupin’s growth in branded generics will remain strong while US generics will see better traction with receding impact of Lotrel and launch of OCs. Torrent and Cipla will reap strong benefit of favourable currency movement. GNP’s revenue growth will remain strong while its earnings growth will be impacted by increase in R&D and other fixed costs.

Valuations: Higher currency peg to lift earnings by 1-4%

The INR has depreciated 19-8% against USD and EUR, respectively, over July-Dec which is positive for Indian pharma companies given that they are net exporters. Further, most companies are expected to enter into hedges (3-4 quarters) at current rate which will benefit future realization. Thus, if we peg the rupee at 50/USD against our current working rate of INR46, FY13E earnings increase by 1-4% for coverage stocks. In addition, we have now included lower DEPB benefits for our coverage universe. We believe the recent amendments by MCA, to capitalize MTM losses, could lead to reversal of loses reported during H1FY12 by CDH, RBXY, Jubilant and Dishman. We remain positive on Lupin, Dr. Reddy’s, Cipla and Glenmark.