Pharmaceuticals - All Gain, No Pain??; Q4FY15 Result Preview ::Edelweiss

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Q4FY15 earnings are likely to remain subdued due to: (i) emerging markets’ (EM) currency headwinds; and (ii) lack of meaningful ANDA approvals. If things fail to improve, it could trigger further earnings downgrades akin to the downward revisions in Q3FY15 (refer our note, “The going gets tough”, dated February 27, 2015). We estimate core revenue/EBITDA growth of 12%/12%, respectively, for our coverage universe, slowest growth in many quarters. US will remain key growth driver, albeit at a slower pace (~6% in Q4FY15 versus 22% in 9mFY15) due to slowdown in ANDA approvals and impact of customer consolidation. India will remain strong on low base of previous year.

Once again! No improvement in ANDA approvals pace

In our recent notes (Waning ANDA approvals pace, dated December 18, 2014) we have detailed out the slowdown in ANDA approvals and do not expect things to improve materially going further. Over the past year, the approval rate for all companies (except Lupin and Dr. Reddy’s) has been dismal and poses the biggest risk to earnings growth / premium valuations going forward.

Emerging market headwinds may become more apparent

EUR and EM currencies, particularly Europe, Russia, Ukraine, Brazil, South Africa, Japan, and UK average Q3 currency depreciated versus INR (17%, 44%, 55%, 17%, 7%, 13%, 8%, respectively, while average USD was up just 1% YoY. Dr. Reddy’s, Glenmark, Ranbaxy, Torrent and IPCA are likely to get hurt more than the others given their exposure to EMs.

Cipla and Cadila likely to report robust earnings growth

We expect earnings to be strong for Cipla and Cadila and soft for Ipca (least preferred pick). Cadila: US key driver with margin expansion on HCQS price hikes / share gains; Cipla: Contribution from Nexium and margin improvement; Sun Pharma: Recovery in US and Ranbaxy merger should drive growth; Aurobindo:Consolidation of acquisition / lack of approvals may hurt growth; Torrent: US/ Brazil may remain sluggish;Dr Reddy’s/Glenmark: Rouble/Real depreciation to continue to hurt business.

LINK
https://www.edelweiss.in/research/Pharmaceuticals--All-Gain,-No-Pain;-Q4FY15-Result-Preview/28750.html