Pharma - Q3FY14 Results Preview - Domestic business to stand out after a slowdown - Centrum

We expect pharma companies under our coverage to deliver healthy growth for Q3FY14 despite a slowdown in the domestic business due to NPPP and trade related issues. On exports too, companies are likely to report strong growth due to new launches in the US generics market; exports are likely to be prime movers of EBIDTA margins. All these should lead to companies under our coverage to report a 27% YoY growth in net profit. We have changed our rating for Abbott India (AIL) to Hold from Buy due to its rich valuations. Sun Pharma (SPIL), Lupin and Aurobindo Pharma (APL) remain our best picks.

APL, Biocon, Merck and Sun to outperform: The 13 pharma companies in our universe are likely to report 15%YoY growth in revenues for Q3FY14 despite sharp price reduction due to NPPP and trade related issues in the domestic market. However, the domestic market has shown signs of recovery from Nov'13 onwards with 6.9% growth. We expect APL, Biocon, Merck and SPIL to report over 20% growth. We expect Glaxo SK Pharma (GSK) to report 4% YoY decline in revenues due price reduction of their major brands and trade related issues in the domestic market.

Steady improvement in margins despite adversities: We expect 40bps YoY improvement in EBIDTA margin to 21.7% from 21.3% for companies under our coverage. This is despite price reduction of major brands, higher trade margins, rise in imported raw material cost and higher transportation cost. We expect further improvement in margin due to gain in volumes of major brands that suffered price reduction under NPPP. We expect APL, Biocon, Cipla Dishman Pharma (DPCL), Lupin, Sanofi India (SIL) and SPIL to report over 20%YoY EBIDTA margin.

Benefit from rupee appreciation: We expect APL and Ranbaxy Labs (RLL) to benefit from ~1% appreciation of the rupee against the dollar. Both these companies have substantial exposure to foreign debt. We expect strong growth in net profit for APL, DPCL, Lupin and SIL due to margin improvement. We expect Abbott India (AIL) and GSK's net profit to get adversely impacted by lower margins due to NPPP and trade related issues.

Recommendation & key risk: We expect companies under our universe to report good volume growth in the domestic market due to their strong brands. We have revised our rating downwards for AIL (Hold) due to its lower growth. SPIL, Lupin and APL remain our preferred picks in the pharma space. Key risk to our call will be 1) Impact of higher margins to the trade in the domestic market 2) Regulatory risks from international agencies for manufacturing facilities located in India.

Source : Equity Bulls

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