Pharma - Sector Update - Strong growth leads to re-rating: Centrum

Strong growth leads to re-rating



We expect pharma industry to perform well on both domestic and global
fronts due to good growth across geographies. Despite price cuts under
NPPP, the domestic pharma market is expected to report good growth in
FY15 on a lower base. On exports too, companies are likely to report
strong growth for existing products and new launches in the US
generics market.  All these should lead to companies under our
coverage to report 19%YoY growth in revenues, 24% growth in EBIDTA and
30% growth in net profit during Q1FY15. Lupin, Aurobindo Pharma (APL)
and Pfizer remain our best picks. Key risks to our assumptions include
slowdown in the domestic pharma market and risks from global
regulatory agencies.

$ Domestic pharma market –  on a growth path: The domestic pharma
market is likely to report good growth from Q1FY15 onwards as the
Government has allowed 6.3% increase in prices for the 348 price
controlled drugs and up to 10% per annum for drugs outside price
control. This is likely to benefit the entire pharma industry. After
the announcement of price control on 348 drugs, the domestic pharma
market fell to 6.8% in Sept’13 from 8.2% in August’13. We expect the
growth momentum to continue due to the recent price revision and new
product introductions.

$ Companies under coverage to report healthy growth:  For Q1FY15, we
expect the 13 pharma companies under our coverage to report 19%YoY
growth in revenues, 24% growth in EBIDTA and 30% growth in net profit.
We expect 90bps improvement in EBIDTA margin to 24.4% from 23.5% due
to good growth in both domestic and export markets. Companies under
our coverage constitute 36% of the domestic pharma market and are
expected to perform well due to the recent price revision by NPPA and
lower base.

$ Expectations from Union Budget: The pharma sector expects exemption
for exports from service tax and MAT and also for SEZ units from MAT.
The industry expects further exemption on R & D equipment and capital
goods from excise and customs duties. There is a demand to allow 100%
FDI in pharma and biotech sectors through the automatic route. The
200% weighted average deduction for in-house R & D should also include
patent filing fees and global clinical trial expenses. We expect the
Government to exempt exports from service tax and MAT and SEZ units
from MAT.

$ Recommendation & key risk:  We have rolled our target prices to
June’16E EPS from Mar’16E EPS.  We have changed the target multiple
for Dishman Pharma (DPCL) to 10x from 8x and for Pfizer to 19x from
18x in expectation of improved performance. Pharma companies have
outperformed the Nifty during the last month due to a sector switch.
Lupin, APL and Pfizer remain our preferred picks in the pharma space.
Key risks to our call will be 1) slowdown in the domestic pharma
market 2) Regulatory risks from international agencies for
manufacturing facilities located in India.



Thanks & Regards

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