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US launches, domestic sales rebound help revenue growth in sector

Source : BUSINESS_STANDARD
Last Updated: Mon, Jan 16, 2012 19:20 hrs
Mid-sized pharma margins to crimp despite sales

Forex gains from the 15 per cent rupee depreciation in the December 2011 quarter and upsides from drugs sold under exclusivity are likely to help top pharmaceutical companies post a 20-25 per cent growth in revenues in the quarter. If one-offs are adjusted, the sector is likely to grow by 18 per cent, while operating and net profits should register a growth of 17-25 per cent.

Companies which could post the highest gains on top line and bottom line in the quarter include Divi's Laboratories, Sun Pharma, Dr Reddy's and Ranbaxy Labs. The outlook for the sector continues to be good, given the opportunities in the US and emerging markets, as well as the growth rebound in the domestic pharma space. Stocks that find favour among most analysts are Cipla and Lupin, which are trading at 19 times and 17 times FY13 earnings estimates, respectively.

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Product launches, India sales
The quarter saw launches in the US market by Ranbaxy (Lipitor), Dr Reddy's (Zyprexa), Glenmark (Malarone) and Lupin (Fortamet). The biggest gainer would be Ranbaxy, expected to show overall revenue growth of 45 per cent, followed by Dr Reddy's at about 30 per cent. Sales in India have been robust, too, with year-on-year growth of 14 per cent in October and 21 per cent in November. Analysts believe sector growth is likely to be 15-16 per cent for the quarter.

While the chronic segment continues to grow upwards of 20 per cent, the acute segment which has been a laggard in the first half of the financial year (with nine per cent growth) is likely to rebound and register growth of 17-18 per cent in the second half. A report by MSFL Research says companies such as Cipla and Ranbaxy are likely to benefit the most, due to their high exposure to the acute segment, while Dr Reddy's will struggle, as its top brands are facing stiff competition from smaller players.

Currency gains, MTM losses
The rupee depreciation, both against the dollar as well as the euro (11 per cent) in the quarter, should help Indian drug firms such as Divi's Laboratories, Cipla, Jubilant and Dishman. Motilal Oswal's Nimish Desai and Amit Shah, in a recent report, say companies with adequate hedges like Dr Reddy's, Lupin and Ranbaxy would not benefit as much as others with lower hedges. However, mark-to-market (writing down assets to relect current values) losses will impact companies which had taken forex loans due to the 7.5 per cent sequential depreciation of the rupee.

Cipla, Lupin key picks
The BSE Healthcare index continues to trade at a premium of nearly 50 per cent to the Sensex (on a trailing basis). Given the robust earnings growth expectations and the tilt towards defensives in a volatile and uncertain market, analysts expect the premium to stay. Cipla stands to benefit from a pick-up in the domestic anti-infective and gastro-intestinal segments, higher return ratios (Indore SEZ capacity utilisation) and commercialisation of CFC-free inhalers in Europe. Lupin's US product basket (oral contraceptives), traction in the Japanese market after the I'rom Pharma acquisition, strong presence in the fast-growing chronic segment and from Eli Lilly's insulin franchise in the domestic market will enable it to grow at a robust pace.

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REVENUE BOOST
In Rs crore Sun Pharma Dr Reddy's Cipla Ranbaxy Lupin
Revenues 1,938 2,433 1,859 3,254 1,691
% chg y-o-y 24.0 28.2 19.7 57.5 15.3
Ebidta 776 616 498 975 320
% chg y-o-y 76.3 54.7 44.9

7.9
Net profit 629 372 340 -1,836 211
% chg y-o-y 106.0 36.1 46.4

-5.5
P/E (x) (FY13E) 21.4 16.1 19.0 9.3 17.0
Figures are for December 2011 quarter
E: Estiimates Source: Nomura




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