Pharma - Q3FY14 Results Preview - Domestic business to stand out after a slowdown :: Centrum

Domestic business to stand out after a slowdown



We expect pharma companies under our coverage to deliver healthy
growth for Q3FY14 despite a slowdown in the domestic business due to
NPPP and trade related issues. On exports too, companies are likely to
report strong growth due to new launches in the US generics market;
exports are likely to be prime movers of EBIDTA margins. All these
should lead to companies under our coverage to report a 27% YoY growth
in net profit. We have changed our rating for Abbott India (AIL) to
Hold from Buy due to its rich valuations. Sun Pharma (SPIL), Lupin and
Aurobindo Pharma (APL) remain our best picks.

$ APL, Biocon, Merck and Sun to outperform: The 13 pharma companies in
our universe are likely to report 15%YoY growth in revenues for Q3FY14
despite sharp price reduction due to NPPP and trade related issues in
the domestic market.  However, the domestic market has shown signs of
recovery from Nov’13 onwards with 6.9% growth. We expect APL, Biocon,
Merck and SPIL to report over 20% growth. We expect Glaxo SK Pharma
(GSK) to report 4% YoY decline in revenues due price reduction of
their major brands and trade related issues in the domestic market.

$ Steady improvement in margins despite adversities: We expect 40bps
YoY improvement in EBIDTA margin to 21.7% from 21.3% for companies
under our coverage. This is despite price reduction of major brands,
higher trade margins, rise in imported raw material cost and higher
transportation cost. We expect further improvement in margin due to
gain in volumes of major brands that suffered price reduction under
NPPP. We expect APL, Biocon, Cipla Dishman Pharma (DPCL), Lupin,
Sanofi India (SIL) and SPIL to report over 20%YoY EBIDTA margin.

$ Benefit from rupee appreciation: We expect APL and Ranbaxy Labs
(RLL) to benefit from ~1% appreciation of the rupee against the
dollar. Both these companies have substantial exposure to foreign
debt. We expect strong growth in net profit for APL, DPCL, Lupin and
SIL due to margin improvement. We expect Abbott India (AIL) and GSK’s
net profit to get adversely impacted by lower margins due to NPPP and
trade related issues.

$ Recommendation & key risk:  We expect companies under our universe
to report good volume growth in the domestic market due to their
strong brands. We have revised our rating downwards for AIL (Hold) due
to its lower growth. SPIL, Lupin and APL remain our preferred picks in
the pharma space. Key risk to our call will be 1) Impact of higher
margins to the trade in the domestic market 2) Regulatory risks from
international agencies for manufacturing facilities located in India.



Thanks & Regards

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