Pharma sector may see mixed operating performance in 3QFY14E: Kotak Institutional Equities

Kotak Institutional Equities (KIE) has posted the 3QFY14E earnings preview report for the pharmaceutical sector. According to Krishna Prasad, Pharma Sector Analyst, Kotak Institutional Equities, KIE expects mixed operating performance for the sector with US launches and currency benefit to be the key growth drivers. Sun Pharma and Dr Reddy’s will lead the sector while Lupin US generics growth is expected to remain strong. Stable growth is expected for Glenmark and remain conservative on recovery in Cipla/Cadila in 3QFY14.

KIE expects core profit growth of over 15 per cent year-over-year (y-o-y) across the sector except Cipla. Sun Pharma and Dr Reddy’s will lead the pack– 45 per cent and 33 per cent y-o-y net profit growth, respectively. In both cases, US generics will be the primary growth driver along with currency. For Lupin, it is estimated 13 per cent yoy growth in earnings before interest, taxes, depreciation, and amortization (EBITDA) while PAT growth of 26 per cent is driven by lower tax rate. A strong margin expansion for Dr Reddy’s (360 bps y-o-y) driven by US launches more than offsetting the sharp decline in PSAI. On a yoy basis, Sun Pharma will benefit from favourable market conditions in Doxil, price increases sustaining in Taro/Doxycycline and consolidation of URL/Dusa. For Lupin, the strong growth in US generics is partially offset by muted performance in India/Japan leading to marginal decline (40 bps) in EBITDA margin.

A sharp recovery in core EBITDA margin for Ranbaxy (at nine per cent) driven by lower remediation expense is expected. A stable earnings performance for Glenmark with 19 per cent y-o-y growth in core net profit is also expected.

The Indian formulations growth will remain subdued for most players except Glenmark and Sun (at 16-17 per cent y-o-y). A weak growth for Cadila/Ranbaxy (five per cent y-o-y) while Dr Reddy’s, Cipla and Lupin are expected to grow at 10-13 per cent y-o-y. The channel disruption witnessed in 2QFY14 has eased though the trade margin issues are still under negotiations. A gradual recovery in domestic growth rates through FY2014 is also expected.

KIE expect US generic launches to be the key growth driver offsetting weak growth in India. The improving US product mix and currency remain key margin drivers for Indian generics.

EP News Bureau- Mumbai