| Summary of Contents SHAREKHAN SPECIAL Q4FY2013 Pharma earnings preview
US business drives the growth Key points -
Q4FY2013 revenues to be driven by US business: We expect our pharmaceutical (pharma) universe to report a 23.4% year-on-year (Y-o-Y) growth in the revenues, mainly led by Sun Pharmaceutical Industries (Sun Pharma, up 40.8% YoY) followed by Aurobindo Pharma (up 26.8% YoY) and Glenmark Pharmaceuticals (Glenmark Pharma; up 24.8% YoY). The growth in the revenues is mainly led by the domestic players' US business.
The revenues from the US business are likely to grow by 40.8% for our universe, mainly led by Aurobindo Pharma (55% year on year [YoY] on launch of new products and due to low base effects) followed by Sun Pharma (65% YoY on contribution from the newly acquired entities and the launch of key products), Glenmark Pharma (25% YoY on contribution from the launch of generic products). The players like Lupin (18.8% YoY) and Cadila Healthcare (Cadila Health; 16.1% YoY) would witness a relatively slower growth due to price erosion in the key products. The growth during the quarter would also be contributed by the acquisitions in case of Sun Pharma (nearly two-month revenues coming from the new acquired DUSA Pharmaceuticals [Dusa Pharma] and the generic business of URL Pharma). Excluding revenues from the newly acquired entities, our universe would be growing at 33% YoY.
The domestic market is likely to grow at 16.6% for our universe as compared with the industry growth of nearly 13% during the quarter (as per the secondary sales data). The growth in the domestic market is mainly led by Ipca Laboratories (Ipca Labs; 28.3% YoY), on better contribution from the newly expanded field force, followed by Cadila Health, on account of the launch of new products and contribution from the newly acquired Biochem Pharmaceutical Industries (Biochem Pharma). Glenmark Pharma is also likely to post an impressive 22.4% Y-o-Y growth in the domestic market on the launch of niche products. -
OPM to expand by 144 basis points YoY for our universe on low base: We expect the operating profit margin (OPM) of our universe to expand by 144 basis points YoY to 25.2% on better product mix, favourable currencies and better utilisation of the newly expanded facilities coupled with the low base effect. The expansion in the OPM would be mainly led by Torrent Pharmaceuticals (Torrent Pharma; up 578 basis points YoY due to the low base caused by some non-recurring operating expenses) followed by Aurobindo Pharma (up 475 basis points YoY) on account of the low base due to the import alert on its Unit-VI facilities disrupting the supplies and margin in Q4FY2012, Lupin (up 360 basis points YoY) on account of the low base in Q4FY2012 due to commencement of production from the Indore special economic zone (SEZ) facilities, which caused higher overhead expenses, and Ipca Labs (up 300 basis points YoY to 22.8%) due to consolidation of Tonira Pharma (Tonira) and weaker export sales impacting the margin in Q4FY2012. On the other hand, the contract research and manufacturing services (CRAMS) players like Dishman Pharmaceuticals (Dishman Pharma) and Divi's Laboratories (Divi's Labs) are likely to witness a decline in their margin due to a lower contribution from the high-margin CRAM business. -
Higher effective tax rate to restrict the profit growth at 18.7% for our universe: Our pharma universe is likely to record a growth of 18.7% YoY mainly due to the higher effective tax rate due to the imposition of alternate minimum tax (AMT) on partnership-based manufacturing facilities and a sunset clause for export-oriented units (EOUs). However, players like Aurobindo Pharma (net profit to multiply 23 times on a Y-o-Y basis from low base), Lupin (75% YoY), Torrent Pharma (34.6% YoY) and Ipca Labs (up 34.1% YoY) are expected to outperform peers. On the other hand, we expect a decline in the profit of Dishman Pharma (down by 32.8% YoY), Cadila Health (down by 32.8%) and Divi's Labs (down by 4% YoY) due to the weaker margins and higher effective tax rates. -
Sector valuation and view: We expect the pharma players in our coverage to report a strong revenue and profit growth despite the absence of the one-offs (sole exclusivity). The growth would be mainly led by the newly acquired entities and scaling up of the newly started facilities. However, the industry is facing a currency risk, which though is favourable at the top line, but may cause severe damage to the bottom line. We have not considered the mark-to-market (MTM) foreign exchange (forex) loss or gains to arrive at the adjusted profits of players during the quarter.
On an average basis, our universe is trading at 14.2x FY2014E earnings, which is 12% discount to the BSE Healthcare Index (Bloomberg consensus estimate at 16x). We found that Aurobindo Pharma (nine key approvals in the US market), Sun Pharma (strong contribution from Taro Pharma (Taro) and the newly acquired entities in the US) and Lupin (10 key approvals in US and an overall good performance) are well placed to outperform peers.
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| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | | | | | |
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