We expect the pharma universe to sustain its strong growth trajectory with core margins likely to remain steady sequentially. We see pressure on earnings due to MTM forex losses (result of a sharp INR depreciation) and higher tax rates. Within geographies, we see a strong surge in the US market from limited competition launches and continued exclusivity sales of Ziprasidone/Lipitor. We also expect a firm traction for Sun Pharma (SUNP), Lupin (LPC), Dr. Reddy’s (DRRD) and Cipla among large caps and Glenmark in the mid-cap space. ARBP should also report improved margins.
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Recurring growth to sustain as one-offs add icing to cake
We expect a revenue growth of 32%YoY in-line with the growth trend of Q4FY12 (at 34%YoY). Growth will be led by the US demand, a seasonally strong quarter in India and continued momentum in emerging markets. High value limited competition launches and exclusivity sales from Lipitor and Ziprasidone would also contribute to higher profitability. We estimate a margin expansion of 262bpsYoY despite higher base of licensing income in the corresponding quarter (for players such as Cadila, Torrent and Glenmark). Despite a strong operating performance, PAT growth of 25% is impacted by higher forex loss (MTM), increase in tax rates and higher interest costs (based on revised guidelines as per Schedule VI).
Sun Pharma, Lupin and Dr Reddy’s on a firm footing
We expect SUNP, Lupin and DRRD to report strong earnings growth led by higher realizations and niche product launches in the US. Lupin’s growth in the US generics is estimated at 90% YoY led by launches such as Combivir, Nor QD (OC) and Fortamet. We believe SUNP would grow from the ramp-up of Doxil and constant benefits from price increases in Taro although we see a sequential margin pressure for Taro. RBXY’s profits will have a positive impact from the residual exclusivity of Lipitor sales. Cipla will reap greater benefits from the supply of Lexapro formulations to Teva and INR depreciation. Glenmark’s core revenue growth would remain strong with margins firming up on back of niche launches in the US. ARBP’s margin might see a marginal improvement QoQ though YoY, it would be subdued due to operating issues and a higher cost base. We see higher forex losses for Glenmark, Cadila and Aurobindo.
Valuations: Negative overhang from regulatory risks
Given the higher growth in domestic market and huge patent cliff opportunities, we see the pharma sector in a sweet spot over the short term. However, going forward, we are cautious on the sector as generic players might face growth pressures from shrinking pipeline of patent expiries. Incremental growth will come at lower margins due to an increase in competitive intensity and higher fixed costs. Also, regulatory risks such as impending regulatory issues and drug price control policy have the potential to de-rate the sector.Lupin, Cadila and Glenmark are our preferred bets.
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