The ramp-up in specialty portfolios has been slower than anticipated, squeezing margins in the interim due to huge upfront costs.
Most brokerages expect mixed earnings for the pharma sector for the second quarter of the financial year 2020.
"We expect Indian players to report a mixed performance in Q2FY20 on the back of some recovery in Indian and US businesses, while performance in the rest of the world markets is expected to be weak against a healthy performance last year," IDBI Capital said in a report.
Cumulatively, the brokerage firm expects a 7 percent year-on-year (YoY) growth in revenue, a 10 percent growth in EBIDTA and 6 percent growth in profit after tax (PAT) from the pharma companies under its coverage. It expects a flattish EBIDTA margin at about 20 percent in Q2.
However, pharma companies have faced headwinds in the US market due to USFDA action on major facilities. Brokerages are of the view that regulatory compliance issues at a few sites continue taking a toll on new approvals.
"Barring Cipla, which continued to get benefits of ‘at risk’ launch of gSensipar, most of the frontline players are expected to report a single-digit growth in the US market during Q2FY20," said IDBI Capital.
The US continues to remain a key earnings driver for Indian companies but the generic segment has been hit by compliance-related issues. Competition in base portfolios and a lack of meaningful approvals and launches have added to the problems.
The ramp-up in specialty portfolios has also been slower than anticipated, squeezing margins due to huge upfront costs.
IDBI Capital expects the base business to see a moderate growth, as Indian players have started consolidating their position and shifted focus on branded and specialty business.
Motilal Oswal Financial Services, too, expect a softer quarter.
"After three-quarters of the uptrend, the year-on-year (YoY) aggregate performance of our coverage universe is likely to moderate in 2QFY20," said the brokerage firm.
The brokerage expects the aggregate sales to grow by 9.4 percent YoY in the quarter.
"The reduced scope of business from product-specific opportunities in US generics (due to intensifying competition) is expected to limit EBITDA growth to 10.9 percent YoY," Motilal Oswal said.
The brokerage further added that a challenging base (lower depreciation and tax in the year-ago period) will likely result in only a marginal 1.4 percent YoY growth in aggregate earnings.
Emkay Global Financial Services thinks the trend of earnings per share (EPS) cuts will continue in Q2, as US growth is likely to be weak for nearly all companies due to a sharp decline in approvals in the quarter, lack of meaningful launches, and competition in base portfolios.
However, the brokerage is hopeful of revival in domestic growth, benefitting from the late onset of monsoons.
"A meaningful recovery in overall earnings still remains elusive. We remain selective and prefer Divi’s and Ipca as absolute buys and Cipla and Aurobindo on a relative basis," said Emkay Global.Disclaimer: The views and investment tips expressed by brokerages on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.