Our pharma universe’s Q4FY12 results were skewed on account of FTF sales of a few higher value opportunities (Lipitor, Doxil, among others), higher other income, MTM gain and year-end adjustments, which impacted performance versus our expectation. Overall reported revenue growth was 34%YoY. While EBITDA margins jumped 442bps YoY, PAT grew 54% YoY. Adjusted for one-offs, recurring revenue grew 22% YoY and PAT rose 19% YoY, in line with our expectation. Core EBITDA margins soared 285bps YoY, however, dipped 172bps QoQ due to lower gross realizations. We highlight that despite margin expansion, PAT growth was lower due to higher tax provision during the quarter. We believe that earnings growth maintained a decent double-digit trend and owing to lower risk appetite, the pharma universe outperformed the market.
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It was a mixed bag
Barring a few outperformers such as Sun Pharmaceuticals (SUNP), Cadila (CDH) and Glenmark, performance of our pharma universe was mixed, particularly on the margin front. SUNP and Ranbaxy (RXBY) outperformed our earnings estimates due to one-time sales from Doxil/India business and Lipitor, respectively. CDH, among large caps, reported good recovery with strong upside from Hospira JV and higher growth in domestic market. Cipla’s operating performance was below par despite strong growth in exports and domestic formulations. Dr. Reddy’s (DRRD) and Lupin reported robust revenue growth aided by strong surge in US; however, change in business mix impacted gross margins. Among mid caps, IPCA’s and Torrent’s operating margin performance was below expectations; however, IPCA posted strong recovery in domestic business. Aurobindo (ARBP) was the worst performer with a 59% YoY dip in earnings.
Business mix change, lag effect of high crude prices dented margins
Our analysis indicates that margin performance during the quarter was dismal, albeit in an atypical low margin quarter. This is attributed to lower gross margins, which plunged a steep 318bps QoQ despite strong currency realizations. This can be attributed to: (a) change in business mix with lower contribution from domestic business (seasonally lower quarter) and higher contribution from US generics and API; (b) lag effect of high crude prices; and (c) margin pressures/charge backs in US.
Valuations: Strong growth visibility till FY13
Despite pressure on margins, earnings momentum across our coverage universe was strong led by robust out performance in the US and higher traction in the domestic market. Going forward, we expect the earnings traction to remain strong till FY13; however, pace of growth is likely to decelerate in FY14 owing to fewer drugs going off patent. Hence, we prefer companies with strong pipelines anddifferentiated portfolios to sustain growth beyond FY13. Lupin is our preferred pick in large caps and Glenmark and Torrent among mid caps.
Regards,
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