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From: The Sharekhan Research Team [mailto:marketwatch
Sent: 26 May 2008 17:04
To: The Sharekhan Research Team
Subject: Sharekhan Post-Market Report dated May 26, 2008
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There have been reports of brisk sales growth and improved margins for the quarter ended March 2008. This year's results have cashed in on domestic market growth, wider product portfolios in regulated market and boost in contract research and manufacturing. Indian companies have around 1.5 percent market share by value and around 12-14 percent by volume, as India exports large quantity of API and low cost generic formulations.
According to Ranjit Kapadia, Head Research (PCG) Prabhudas Lilladher, financial year (FY) 08 belonged to Glenmark Pharma, as it exhibited all round development and growth on all fronts. The company posted a consolidated net Profit After Tax (PAT) of Rs 218.96 crore for the quarter ended March 2008. Main factor that attributed to the growth of this company is the 144 percent growth in the US market and 66 percent growth in global sales of active pharmaceutical ingredients (APIs). GlaxoSmithKline posted a net profit before tax growth of 12 percent compared to previous quarter, while net sales have grown by 5.3 percent on a comparable basis. It can be noticed during the quarter that there was a growth of priority products by nine percent. However, the sales of price controlled products have been impacted by excise drops that are being passed on and consequent price adjustment made due to these changes.
With a backing of strong export thrust and increased domestic sales, Cipla posted a 43 percent growth in the net profit for the quarter ended March 08. Exports that contribute to about 59 percent of Cipla's sales in the quarter saw 23 percent growth, whereas domestic sales on the expanded base saw 13 percent growth. The company's net profit increased by 42.7 percent to Rs 179.5 crore from Rs 125.7 crore during the corresponding quarter in the previous year. Cipla also reported 19.5 percent rise in net sales to Rs 1,112 crore for the last quarter against Rs 938.5 crore reported during the same quarter in the previous year.
Other company that saw a steady rise is Hikal. It saw an increase of 29 percent in sales as the sales for the year ended 31st March 2008 were at Rs 301 crore as compared to Rs 234 crore in the previous year. The profit after tax also increased as it was at Rs 49.8 crore as compared to Rs 33.8 crore in the previous year in spite of appreciation of Rupee. Jai Hiremath, Vice Chairman and Managing Director, Hikal, said that it is for the first time that the sales in pharma business have surpassed the crop protection business. He added that efforts on restructuring of Marsing is on track and on a consolidated basis, the turnover was Rs 461 crore as compared to Rs 428 crore last year and PAT was Rs 48.9 crore as compared to Rs 26 crore in the previous year.
Zydus Cadila also posed an impressive result for the year ended March 08. It registered an increase of 27 percent, a total operating income of Rs 2,325 crore from last year. The net operating profit for the same period is up by 23 percent at Rs 254 crore. The main factor that had led to this growth is the 72 percent growth in formulation exports, 13 percent growth in domestic branded formulation business and 131 percent growth in animal health business.
In the limelight
Nicholas Piramal India Limited (NPIL) who had projected a growth at 16 percent in the current fiscal year. Total operating income on consolidated basis for the quarter ended 31 March 2008 was up by 19 percent to Rs 7.7 billion over Q4 FY 07. Operating profit increased by 139.9 percent to Rs 2.0 billion. Net profit for the quarter was up by 141.7 percent to Rs 1.3 billion. During the quarter, NPIL's domestic branded formulations business reported strong growth of 17.9 percent, with revenues of Rs 3.1 billion. The company's domestic business has thus registered an aggregate growth of 15 percent during the last three quarters of FY 2008. The company's custom manufacturing (CMG) revenues grew 15.3 percent to Rs 3.9 billion during Q4 FY 2008. Custom manufacturing revenues from facilities in India grew during Q4 FY 2008 by 224 percent to Rs 736 million, compared to Rs 227 million in Q4 FY2007.
Over the last six years, Ajanta Pharma has registered compounded annual growth rate (CAGR) of 26 percent in sales and 45 percent in profits. Ajanta Pharma also saw increase in its consolidated net profit by 49 percent to Rs 21.88 crore as compared to previous year's Rs 14.66 crore. Its consolidated income has also grown by 19 percent to Rs 317.48 crore compared to previous year's Rs 267.31. For the quarter ended 31st March, 2008, total income stood at Rs 87.28 crore against last year's Rs 80.10 crore, while net profit increased by 14.84 percent to Rs 8.75 crore against Rs 7.62 crore of last year.
Alembic reported net sales for the year ended March 31, 2008 at Rs 1,027 crore that is up 42 percent compared to Rs 722 crore in the previous year. The net profit for the year ended March 31, 2008 rose by 59 percent to Rs 112 crore, as against Rs 71 crore posted in last fiscal. Sales for the fourth quarter stood at Rs 268 crore, a growth of 58 percent as compared to Rs 169 crore in the corresponding quarter of the previous year. The company reported a net profit of Rs 15.34 crore for the quarter ended March 31, 2008, a jump of 39 percent as against Rs 11.05 crore posted in the same period of last fiscal. The company's efforts in the last few quarters to break into regulated markets have started yielding results. The company's annual sales to regulated markets was Rs 189.02 crore against 49.87 crore in last fiscal, while quarterly sales were Rs 71.72 crore against last year's Rs 11.25 crore.
Some pharma companies showcased a decent performance one of which is Plethico Pharma Ltd (PPL). It reported a decent performance during the last quarter for the year ended December 2007. This year, PPL changed its year ending from September 30 to Dec 31. Therefore FY 07 would be a 15-month period. Its top line grew by 48.1 percent y-o-y to Rs 1203.2 million during the quarter ended December 2007. On a cumulative basis for 15M FY 07, total revenue increased by 35.3 percent y-o-y to Rs 5554.4 million. For the quarter ended December 2007, PPL reported Earnings Before Depreciation, Interest, Taxes and Amortization (EBDITA) growth of 45.3 percent y-o-y to Rs 344.2 million compared to Rs 236.9 million in corresponding quarter last year. For 15 M FY 07, EBDITA growth stood at 32.1 percent y-o-y to Rs 1628.0 million. However, PPL's overall EBDITA margin for the period declined by 110 basis points to 28.8 percent. PPL recorded 51.9 percent y-o-y growth at net profit level to Rs 299.8 million during the quarter ended December 2007 and 49.7 percent y-o-y growth to Rs 1583.3 million for 15 M FY07.
Though comparatively, this quarter has been fruitful for most pharmacos, there are some who had to face setbacks. Hyderabad based Suven Life Sciences saw a 33 percent fall in the net profit to Rs 1.94 crore in the fourth quarter for the year ended March 2008 compared to Rs 2.91 crore last year. However, although there is a decrease in net profit, revenues had increased 22.67 percent to Rs 35.16 crore ie Rs 28.66 crore. Rupee appreciation is one factor that has affected revenues.
Roadblocks
Recent changes in regulatory framework to report market losses due to currency fluctuations and derivative trading has led to forex losses. Moreover, the rupee has weakened against the dollar by 1.8 percent during the quarter and this has led companies to make provisions for currency fluctuations and translation losses. Kapadia says, "The government's move to bring more products under price control could adversely affect sales and profitability of pharma. The rise in rupee against the dollar can reduce export revenues and would affect sales and profitability of exporting companies."
Pharma trends
The current analysis of results shows that pharma companies who have posted good results have fared very well in domestic and unregulated markets. One place that saw a downfall was in the exports. Only few companies like Cipla gained from exports. Gains from exports were comparatively less, mainly due to rupee appreciation. Many companies have hived of their R&D units so as to transfer expenses related to R&D to the new entity. "As R&D expenses were eligible for 150 percent weighted average deduction, the main company will not be able to claim this deduction. However, due to other tax benefits, tax liability is not likely to increase. Hence, profitability of these companies is likely to improve. Most of the R&D companies are likely to report losses in the initial years due to lack of recurring income. The companies will have to depend on milestone payments on licensing molecules," says Kapadia.
Current results are very satisfying for almost all, but one thing that comes to our mind is how will companies be utilising funds and profits for their benefit. Most companies will be utilising it for expansion and investment in R&D. Kapadia points out that most companies are expanding their activities in Special Economic Zones (SEZ) as after FY 2010, Export Oriented Unit (EOU) benefits will not be available to the companies. On the acquisition front, most recent acquisitions have been done overseas. The likely financing route for overseas acquisition is through American Depository Receipt (ADR)/Global Depositary Receipt (GDR) or Foreign Currency Convertible Bond (FCCB). For the fund requirement for the domestic market, preferential allotment of shares and Initial Public Offering (IPO) are the most preferred routes.
Looking to the future
With a view for expansion and creating a mark the Indian pharmacos are looking at developing countries where regulations are not very stringent and margins are better than in the domestic market. Companies can also introduce branded generics in some of these markets. Therefore, Japan is the new destination as the Japanese government encourages the use of generic products.
Kapadia avers, "The domestic market is likely to grow by 13-15 percent unless the government brings more products under price control. Pharmacos are likely to face competition in US market due to the economic slowdown and severe competition among generic products." He predicts, "The sharing of 180-days exclusivity period by more than one company will also put pressure on prices. Moreover, authorised generics will also limit profitability of generic players in this. The opening of Japanese pharma market is likely to offer good opportunity for the Indian pharma companies."