Anand Rathi Financial Services has come out with its report on third quarter (October-December) earnings expectations for the healthcare sector. The brokerage house says companies under its coverage are likely to post 12 percent Y-o-Y revenue growth.
However, excluding Wockhardt (FDA issues) and Fortis Healthcare (divestments), revenue growth is expected to be 19 percent Y-o-Y, the report adds.
Healthcare report
The growth would be largely driven by US generics, expected recovery in domestic formulations and favorable currency. Sun Pharmaceutical Industries, Dr Reddys Laboratories, Cipla, and Ipca Laboratories 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 Y-o-Y, to 23 percent, 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 percent Y-o-Y, higher than revenue growth. Sun Pharma, Lupin, Dr Reddys, Cadila Healthcare, Pfizer, and Ipca Labs would register higher net profit growth.
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 are Dr Reddys Labs, Cipla, Sun Pharma, Indoco Remedies, and Natco Pharma. We have a sell on Ranbaxy Laboratories.
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