Thursday, August 23, 2012

>Q1FY2013 Pharma earnings review

Weaker rupee and key launches drive growth
  • Pharma universe's performance better than expected: Most of the players in Sharekhan's pharmaceutical (pharma) universe reported better than expected results during Q1FY2013. The universe reported a 39.7% year-on-year (Y-o-Y) rise in its revenues as compared with our estimate of a 34.7% growth. The operating profit margin (OPM) jumped by 412 basis points year on year (YoY) to 27.6%, which is 270 basis points higher than our estimate. However, due to a sharp jump in the fixed costs and marked-to-market (MTM) foreign exchange (forex) losses, the reported profit rose by 9.6% YoY for the pharma universe during the quarter. However, excluding the forex losses or gains and the exceptional items, the adjusted net profit increased by 18.5% YoY, which is better than our estimate of a 7.4% growth for the universe. The profit growth was mainly led by Ipca Laboratories (Ipca; up 93% YoY), Divi's Laboratories (Divi's Labs; up 63% YoY) and Sun Pharmaceuticals (Sun Pharma; 59% YoY). 

  • Higher fixed costs and effective tax rate affects bottom line: Despite the impressive performance at the operating level, the profit of the key players weakened on a sharp rise in the interest and depreciation charges. During the quarter, the interest cost rose by 143% YoY while depreciation jumped by 30% YoY on an aggregated basis. Moreover, the imposition of the alternate minimum tax (AMT) on partnership-based manufacturing units resulted in a sharp rise in the effective tax rate of the pharma universe. The effective tax rate of the universe jumped to 19.8% during the quarter from 11.2% in Q1FY2012. Most affected by the new tax were Sun Pharma (a rise of 1,482 basis points YoY to 17.3%) and Cadila Healthcare (Cadila; a rise of 1,354 basis points YoY to 24.4%) due to the imposition of AMT on their Sikkim-based manufacturing plants.

  • Management of most of key players maintain FY2013 guidance: Most managements maintained their revenue guidance for FY2013 despite an impressive performance in Q1FY2013. We expect the growth to moderate in the subsequent quarter mainly due to a slower growth in the domestic formulation business (from a relatively higher base) and slower depreciation in the rupee against the dollar (up 11% YoY). Nonetheless, strong product pipelines, improved utilisation of the newly commissioned facilities and the contribution from the newly acquired entities would continue to ensure the long-term growth of the pharma universe.

  • Our top pick: We prefer Sun Pharma in the large-cap space due to the strong traction in its US business and its increased focus on the domestic branded formulation business (which has been divested for increased focus). We pick Divi's Labs in the contract research and manufacturing services (CRAMS) space due to the increased traction in the company's CRAMS business and currency benefits. We like Cadila in the mid-cap space for its strong research and development (R&D) for its expected ramp-up in the USA after the US Food and Drug Administration (USFDA) cleared of the company's Moraiya facility and R&D base.