Good performance likely from pharma in Q3: Nirmal Bang

Nirmal Bang has come out with its earnings estimates for pharmaceutical sector for the quarter ended December 2012. The research firm feels margins of pharma companies may witness YoY expansion owing to rupee depreciation (6 percent YoY).

Nirmal Bang' report on Q3FY13 earnings estimates of pharmaceutical sector:

We expect the companies in our coverage universe to report a 20 percent growth in revenue in 3QFY13E led by ramp-up in product launch in the US, recovery in Brazilian market and strong domestic growth. Margins may witness YoY expansion owing to rupee depreciation (6 percent YoY), although we expect flat margins QoQ due to falling sales of lowcompetition/180-day marketing exclusivity products being partially offset by the pick-up in the launch of new products. As per the All India Organisation of Chemists and Druggists’ AWACS data, domestic pharmaceuticals growth moderated to 4 percent in November2012 (18 percent in October 2012), but we believe this reflects in the numbers with a lag and therefore we expect strong growth in 3QFY13. Following the outperformance (9 percent return in BSE Healthcare Index versus 5 percent return in Nifty) over the past one quarter, we prefer to remain selective and rate Ipca Laboratories as the top pick from our coverage universe.

Cadila Healthcare: Revenue growth would be led by strong growth in domestic formulations business, sequential ramp-up in US business led by launch of new products and higher revenue from Brazilian business. Margins are likely to expand due to a better revenue mix, while forex losses would be minimal due to outstanding forex hedge of only US$19mn.

Cipla: Decline in Lexapro revenue due to additional competition (~USD 22mn-USD 25mn in2QFY13) may lead to a sequential drop in revenue. Domestic revenue is likely to trail the industry’s growth. With lower Lexapro sales, we expect the margins to drift lower.

Divis Labs: We expect strong growth in custom synthesis as well as generics business with improvement in margins as the benefit of rupee depreciation offsets the rise in power costs. The company may reverse some of its 2QFY13 forex losses.

Glenmark Pharmaceuticals: Strong domestic growth, recovery in Brazilian business after the employees’ strike at the regulator’s office and lower competition in key products like Malarone/Cutivate/Oxycodone are expected to drive revenue growth. We have factored inUS$9mn milestone income from Forest Laboratories. The company may report forex losses (not factored in our estimates) to the tune of ~Rs800mn on foreign currency loans.

Ipca Labs: We expect a QoQ decline in revenue due to higher institutional sales in 2QFY13. Wehave assumed forex loss of Rs150mn due to forex hedge at a lower rate of ~Rs48/USD.

Lupin: Lower Geodon sales in the US would be partially offset by the launch of new products (including Tricor and Yasmin) and a seasonally strong quarter for Suprax. Sequentially, margins may decline due to higher R&D expenditure. Tax rate is also expected to remain high at ~27 percent.

Sun Pharmaceutical Industries: We expect moderation in Lipodox revenue to be partially offset by higher domestic sales. Taro is likely to sustain its performance and report US$160mn of sales. We expect the tax rate to soften.

Torrent Pharmaceuticals: We expect higher revenue sequentially led by recovery in Brazilian operations after the employees’ strike at the regulator’s office, higher insulin off-take from Novo Nordisk due to new tender wins, launch of new products in the US and strong domestic growth due to low base of the previous year. Margins may also rise due to a better revenue mix (higher proportion of India, Brazil, US geographies).

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