Health Check - Slow approvals + currency headwinds=weak Q3 For Q3FY15 ::ICICI Securities, report link

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Slow approvals + currency headwinds=weak Q3 For Q3FY15, the I-direct universe registered YoY revenue growth of 9.9% to | 28276 crore, driven by 6.8% growth in the US and 15.6% growth in Indian formulations. The growth in the US was more or less on expected lines, subdued by lack of new product approvals and a high base. Growth in Indian formulations was driven by new product launches as well as price hikes. This quarter witnessed heated currency volatility in some of the emerging markets, especially Russia. The EBITDA for the universe de-grew 1.5% YoY to | 7069 crore while the lower growth can be attributed to forex losses, higher R&D spends and remedial expenses to comply with cGMP issues. The PAT de-grew 6.8% YoY to | 4436.6 crore. The de-growth was attributable to lower EBITDA growth and higher depreciation and taxation. On the revenue front, companies such as Aurobindo, Ajanta, Cadila, Apollo Hospitals, Indoco and Torrent Pharma reported strong revenue growth on account of incremental product launches and sustained base business growth. On the other hand, Biocon, Dr Reddy’s, Ipca Laboratories and Jubilant reported a weak set of numbers due to lack of product approvals, impact of currency volatility in emerging markets and regulatory impact. Cipla continued to invest in front ends, this time in Morocco and Algeria. It entered into a JV agreement with existing business partners in Morocco to serve as a launch vehicle for Cipla’s portfolio. Cipla is likely to infuse US$15 million in cash into the JV. Leveraging the commercial strengths of partners, the JV’s initial focus will be respiratory and neurology products. It will also establish a manufacturing facility in Morocco. Similarly, in Algeria, it has entered into a similar kind of joint venture (JV) agreement with the same entity. The JV company will manufacture and market respiratory products facilitating Cipla’s front-end presence in Algeria. Cipla also invested in India based Jay Precision Pharmaceuticals, which is Cipla’s supplier for respiratory devices and has a manufacturing facility in Maharashtra. Finally, on the domestic formulations front, the Indian Pharmaceutical Market (IPM) witnessed strong growth of 12.7% YoY to | 7294 crore for January 2015. The YoY growth was mainly driven by- 1) price hikes - 5.2% and 2) volume growth – 4.4%. Despite Q3 slowdown outlook remains robust on strong visibility The BSEHC stretched its outperformance over broader indices by almost 8% on a YTD basis. After a prolonged strong growth trajectory in the last many quarters, the growth pace for the sector has slowed down in Q3FY15 on account of a slowdown in exports due to: 1) high base, 2) delay in product approvals, 3) volatility in emerging market currencies and 4) regulatory concerns. However, this was on expected lines. Domestic growth, on the other hand, continued to register sound growth albeit on lower base, even though this was still below our expectation. Despite muted Q3, only a handful of stocks witness a correction as most of the managements sounded optimistic about the product approval revival in the US. The BSEHC is currently trading at ~21x on FY17 EPS, almost 50% premium to the Sensex FY17 PE. We expect pharma companies under our coverage to register a CAGR of 16%, 17% and 26% in revenues, EBITDA and PAT in FY14-17E, respectively, on an aggregate basis. Strong visibility on the back of a strong product basket and a reasonable base business growth continue to attract buying interest in the healthcare sector despite premium valuations.

LINK
 http://content.icicidirect.com/mailimages/IDirect_HealthCheck_Feb15.pdf