India Healthcare - Growth recovery likely - Anand Rathi

Revenue growth strong. Companies under our coverage are likely to post 12% yoy revenue growth. However, excluding Wockhardt (FDA issues) and Fortis (divestments), revenue growth is expected to be 19% yoy. The growth would be largely driven by US generics, expected recovery in domestic formulations and favorable currency. Sun, DRL, Cipla, and Ipca are expected to drive most of the revenue growth.

Domestic business could surprise negatively. Considering AIOCD AWACS data, the domestic pharma industry has grown at single digit in Oct- Nov'13 against mid teens in the past few years. The slowdown has been across therapeutic categories, including chronic. Further, implementation of new drug pricing policy would also hit growth and profitability as drug prices have been reduced for essential medicines. However, we believe that most of the companies have settled over margin issues with traders and inventory level would come back to normal levels with volume growth.

Improvement in margins and profitability. We expect EBITDA margins to improve 70bps yoy, to 23%, led by higher US generics growth and favourable currency. Better margins, along with lower interest cost, would result in adjusted PAT growth of robust 20% yoy, higher than revenue growth. Sun, Lupin, DRL, Cadila, Pfizer, and Ipca would register higher net profit growth.

Our take. We expect revenue growth recovery in 3QFY14, led by the US generics, revival in domestic formulations with volume growth and favourable currency.

We remain Overweight on the sector. Top picks. DRL, Cipla, Sun, Indoco, and Natco. We have a Sell on Ranbaxy.

Source : Equity Bulls

Keywords