Pharmaceuticals - EM Headwinds, US Approvals Dearth to Take a Toll; Result Preview Q3FY15 :: Edelweiss

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Q3FY15 earnings are likely to be impacted by: (i) emerging markets` (EM) currency headwinds-Russia/ Ukraine/ Brazil/ South Africa average Q3 currency depreciations versus INR (31%/ 43%/ 11%/ 10%, respectively); and (ii) few ANDA approvals. US will remain the key growth driver, albeit at a slower (16% versus 20% in H1FY15) pace due to slowdown in ANDA approvals and impact of customer consolidation. India is also expected to remain strong on low base of last year (~18% growth). We forecast a relatively muted quarter for our coverage universe with core revenue/EBITDA/earnings growth of 12%/11%/3% YoY, respectively.

Ranbaxy and Cadila likely to report robust earnings

While we estimate Ranbaxy (RBXY) and Cadila (CDH) to post robust earnings, Dr. Reddy`s (DRRD) and Glenmark (GNP) may be soft. RBXY: Diovan`s 180-day exclusivity to benefit, improvement in base margin to continue; CDH: Price hike (3.5x) in HCQS post IPCA`s exit from market to result in strong quarter; Cipla: Transformation underway-margin to rise over H1FY15; Sun (SUNP): Taro price hike benefits to continue; ex-Taro, business improvement critical; Aurobindo (ARBP): Business integration may hurt margin YoY; Torrent (TRP): Strong inorganic growth, but US/ Brazil to be sluggish; DRRD/GNP: Rouble/Real depreciation to hurt topline and profitability.

Emerging markets` macros to play on results and earnings revision

Although a strong USD will benefit Indian pharma going forward, EM currency depreciations and geopolitical issues are likely to weigh on the quarter`s results and could trigger earnings downgrades. EUR and EM currencies, particularly of Russia, Ukraine, Romania, Brazil and South Africa, have witnessed severe depreciation and companies like DRRD (high exposure to CIS), GNP (CIS, Latam, EU), RBXY (EU, CIS, Latam), TRP (Latam, EU) and IPCA (CIS) are likely to get hurt more.

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https://www.edelweiss.in/research/Pharmaceuticals--EM-Headwinds,-US-Approvals-Dearth-to-Take-a-Toll;-Result-Preview-Q3FY15/28005.html