A strong growth in the domestic market, sustained momentum in the US and higher currency realizations (21% YoY depreciation) aided a 36% growth in revenue as against our expectation of 31.6%. While EBITDA grew 58% (EBITDA margin up 337bps YoY), PAT growth was restricted to 42% due to higher tax outgo (20.2% of PBT vs estimated 15.5%). Adjusted for one-offs, recurring revenue grew 28.5% YoY in-line with our expectation. Core EBITDA margins soared 240bps YoY and 150bps QoQ, driven by an improved product mix and better currency realizations. We believe that the earnings growth momentum is likely to sustain till FY13 even though the pace of growth is likely to decelerate in FY14 owing to fewer drugs going off patent.
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Healthy growth across universe, domestic market excels
Pharma universe continued its strong performance, driven by 24% growth in the domestic market (across the universe) and a firm traction in the US core business even as one-offs such as Lipitor, Doxil, Lexapro and Ziprasidone aided the momentum. A currency depreciation of 21% YoY was the icing on this top-line growth. Companies like Sun (SUNP), Lupin, Cipla, Glenmark (GNP) and Torrent reported a robust performance while Dr. Reddy’s (DRRD), Ranbaxy (RBXY) and Aurobindo disappointed on core growth. SUNP and RXBY were benefited due to limited opportunities sales from Doxil and Lipitor while Taro continued to surprise. Cipla’s performance surprised positively given its sturdy domestic growth and improved profitability. A higher than expected price erosion in the US, lower realization from new products and higher R&D costs impacted DRRD performance while Ranbaxy’s base business continued to struggle. Aurobindo (ARBP) was the worst performer with a 30% YoY dip in earnings.
Improved product mix, favorable currency abet margin expansion
Core EBIDTA margins for our universe has improved 240bps YoY and 149bps QoQ to 22.9 driven by: a) improved product mix (gross margins up 250bps YoY) and b) a favorable currency movement. RBXY (low base), SUNP and CIPLA have shown the highest improvement in EBIDTA margins while GNP, ARBP and DRRD have witnessed contraction. GNP’s margins were impacted because of the base effect in one product (Gabapentin) even as DRRD’s margins were hit by a higher than expected price erosion in the US base business.
Valuations: Strong growth visibility till FY13
Earnings momentum across our coverage universe was strong led by a) strong domestic growth, b) robust out performance in the US and c) 21% YoY currency depreciation. Going forward, we expect the earnings traction to remain on track till FY13 though the pace of growth may decelerate in FY14 owing to fewer drugs going off patent. Hence, we prefer companies with strong pipelines and differentiated portfolios to sustain growth beyond FY13. Lupin, Cipla and Cadila are our preferred pick among large caps and Glenmark and Torrent amongmid-caps.
Regards,
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