We expect the pharma universe to continue its growth trajectory led by strong uptick in the US and emerging markets, while domestic growth could tone down due to delayed monsoon. Though margins are expected to remain steady QoQ, YoY they are likely to expand on back of higher realisations. Moreover, the recent appreciation of INR could reverse MTM forex losses for players such as Ranbaxy (RBXY), Glenmark (GNP) and Aurobindo (ARBP). We also expect one-off opportunities to benefit Sun (SUNP), Dr. Reddy’s (DRRD) and Cipla. Among mid caps, IPCA and ARBP are expected to report better growth and earnings.
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Recurring growth to sustain as one-offs icing on cake
We expect revenue growth of 29.8%YoY, in line with the previous quarter (30% YoY). While growth will be led by US and continued momentum in emerging markets, India could see lower growth momentum. High value one-time opportunities such as Tacrolimus for DRRD and Doxil for SUNP will also contribute to higher profitability. We estimate margin expansion of 223bpsYoY and EBITDA growth of 42%. PAT growth is estimated at 38% with some negative impact from increase in tax rate.
Sun Pharma, Dr. Reddy’s and Cipla on firm footing
We expect SUNP, DRRD and Cipla to report strong earnings growth led by higher realisations, continued growth in branded generics and one-time high value launches in US. Cipla could also see favourable impact from accrual of milestone income from Meda. Lupin’s growth in US generics to benefit from higher market share gain in Combivir and Geodon. RBXY’s profits will have positive impact from exclusivity sales of Actos. GNP’s revenue growth will remain strong; however, reported numbers are likely to face base effect from licensing income. Among mid caps, we expect QoQ margin improvement for ARBP from higher operating leverage in US, while IPCA is likely to also report strong momentum from higher anti-malaria exports.
Short-term favourable impact from MTM gains
Given the appreciation in currency (from USDINR 54 at end Q1FY13 to 52.9 end September 2012) reported earnings for GNP, RBXY and ARBP are likely to get a boost from reversal of MTM forex losses as these have higher foreign currency loans.
Valuations: Negative overhang from pricing policy
We are cautious as we foresee slower earnings growth during H2FY13 on a high base, which coupled with challenging regulatory environment and lower currency realisations (sequentially) could have negative bearing on valuations. We estimate a potential loss of INR20bn (2.5%-3% of domestic sales) from current pricing policy, which could rise to INR60mn if cost-based pricing model is adopted. The final policy outcome, if in favour of cost-based pricing, could potentially de-rate the sector. Hence, we continue to remain stock specific. Lupin, Cadila and Glenmark are our preferred bets in large caps and IPCA in mid caps.
Regards,
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