Moneycontrol PRO

Pharma Q4 Preview | Despite strong domestic demand and modest US growth, cost pressure, lower prices to dent margins

Raw material prices aggravated due to COVID-led lockdowns in China and spike in logistics costs to overshadow revenue growth

April 18, 2022 / 03:11 PM IST
 
 
live
  • bselive
  • nselive
Volume
Todays L/H
More

The performance of the Indian pharmaceuticals sector has been under pressure for past four-five quarters, especially with the easing of the COVID situation in the country and rest of the world.

Experts hope the industry will deliver a modest earnings performance for the fourth quarter of FY22 on account of a steady domestic performance and improvement in US sales amid concerns of lower COVID contribution and elevated cost pressure.

The revival in Domestic Formulation (DF) core therapies and marginal improvement in ANDA (abbreviated new drug application) approvals would drive sales growth during the quarter. The growth in sales is likely to be negated by higher raw material and logistics costs which are likely to lower EBITDA and PAT growth on an aggregate level for the quarter.

Indian market

“The Indian pharma market grew by 3.9 percent YoY in Q4FY22 as an on-year volume decline of 3.3 percent was offset by a price growth of 5.3 percent and new introduction growth of 1.8 percent YoY,” a report from Axis Securities said.

As per the industry data, while the anti-infective segment declined by 4 percent YoY, chronic segments remained muted as cardiac grew 4 percent YoY, anti-diabetic was up 2 percent YoY and CNS (central nervous system) grew 3.4 percent YoY.

Other key segments such as the respiratory segment witnessed a surge of 27 percent YoY, while vitamins and derma declined 1.5 percent and 4 percent YoY.

“India business to continue the growth momentum and register double-digit on-year rise (driven by recovery in acute therapies and continued momentum in chronic segment) in Q4FY22,” a report from the brokerage firm Phillip Capital said.

It expects its coverage universe to clock 11 percent growth in the domestic formulations business led by 29 percent growth in IPCA Laboratories (strong branded performance), followed by 10-11 percent growth in Dr Reddy’s (Wockhardt integration), CIPLA (strong respiratory franchise), Lupin (steady growth in base) and Sun Pharma (growth led by recent field force expansion).

“We expect the domestic formulations segment sales to grow 14.3 percent YoY on an aggregate basis for the companies under our coverage,” a report from Motilal Oswal said.

The segment saw a better traction in COVID as well as non-COVID therapies for the quarter. Respiratory, rain, and anti-infective therapies, in particular, recorded strong growth driven by healthy demand and partly by the low base of the past year. However, the third wave resulted in muted demand for chronic therapies.

Company-wise, Motilal Oswal expects Dr Reddy’s to report 35 percent YoY growth in DF revenues in Q4FY22 which is backed by continued outperformance in gastro/cardio/anti-diabetes segments.

Zydus Lifesciences is expected to deliver 32 percent on-year growth, IPCA Laboratories 20 percent, Sun Pharma 15 percent and  Glaxo DF sales are expected to put up 14 percent growth.

US Market

US business for the sector as a whole is expected to be moderate for most companies owing to continued price erosion and limited new launches. Logistic costs are also likely to impact the margins in the US business as Indian companies export products from India to the US.

“We expect the US business to record a modest 4 percent growth in Q4 for our coverage on account of continued pricing pressure in the base portfolio,” a report from Phillip Capital said.

While the pricing erosion in base business continued to have an adverse effect on the US sales run-rate, the new launches are likely to offset the decline in base business and enable growth for the quarter, experts said.

With COVID cases waning and travelling restrictions easing, the pace of inspections is predicted to improve, thereby boosting approvals.

“We expect new launches and market share gains in complex products to drive 13 percent and 17 percent YoY sales growth for Dr Reddy’s and CIPLA, respectively,” a report from Motilal Oswal said. “We further forecast Sun Pharma and Zydus to deliver a marginal YoY growth led by increased competition in the base portfolio.”

Margins and Earnings

COVID-led lockdowns in China have further aggravated supply chain situation and has resulted in spike in raw material prices. This coupled with high logistics costs are expected to further impact the margins for the companies.

According to a report from Edelweiss Research, a few trends are evident: (i) Input cost pressures to further compress gross margin – expecting 25-40bps QoQ decline. (ii) Cost headwinds such as rising freight, power, fuel to pinch EBITDA margin: expect 80-100 bps QoQ decline.

Among specific stocks, Dr Reddy’s is likely to benefit from market share gains in its cardiac care portfolio. Improved US mix and sustained domestic outperformance will benefit Cipla’s earnings. Continued traction in CRAMS (contract research and manufacturing services) and increased capacity utilization are anticipated to drive strong earnings growth for DIVI’s Labs.

Continued Specialty momentum and sustained performance on domestic formulations will help drive earnings for Sun Pharma while strong domestic performance by IPCA Labs will offset the elevated RM costs resulting in mid-teens earnings growth.

Dr Reddy’s however, has a huge exposure to Russia – CIS markets and it will be important to monitor its management’s comments on the impact of Russian trade challenges and its future strategy.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Gaurav Sharma