INSUBCONTINENT EXCLUSIVE:
NEW DELHI: A likely flash of brilliance may not just be enough for this sector to win over analysts
Pricing challenges remain, but the good part is regulatory environment is improving for the pharma sector
The industry is expected to make an earnings rebound in the June quarter -- up to 50 per cent surge in net profit -- largely driven by a low
If analysts are to be believed, this sector is up for a gradual comeback in FY19, but the current valuation may not be that compelling to
go long-term bullish on the space.
50% spike in Q1 profitsEdelweiss Securities expects the sector to report a jump of 17 per cent in
revenues and nearly 50 per cent in profits
Motilal Oswal Securities, whose pharma universe bounced back in January-March following four consecutive quarters of double-digit earnings
decline in 2017, is seeing 44 per cent profit growth.
Phillip Capital sees its pharma universe reporting 42 per cent YoY growth in earnings
on a 12 per cent rise in revenues growth
This brokerage noted that the ANDA approvals rate in the three months to June improved to 200, from 112 in the preceding quarter, even as
the quarter witnessed only a few new launches by domestic drug makers
The brokerage is positive on Biocon, Cipla, Divi's Labs, IPCA Lab and Sun Pharma, and negative on Glenmark and Lupin as far as quarterly
earnings go.
The earnings recovery hinges on bottoming out of pricing pressure in the US market, but the worst, insofar as earnings are
concerned, is over for the healthcare sector, Motilal Oswal Securities said.
Large cap drug makers may take a lead, thanks to regulatory
resolutions, moderating price erosion and new product launches in the second half of the financial year, said HDFC Securities
The brokerage is expecting pharma stocks under its coverage to report first double-digit revenue growth in six quarters.
Pricing pressure
loomsIn case of price erosion, analysts feel that significant price erosion may happen only for drugs where there are fewer than three
Besides, they feel that the government many bring in more life-saving drugs under the DPCO (Drug Price Control Order) ambit ahead of state
and general elections.
"Lowering drug prices by adding drugs to DPCO is expected to gain a favour of citizens during the 2018 state and 2019
The impact of adding new drugs to DPCO is to lower both the revenues and profits of pharma companies whose drugs may be added to DPCO," said
Karvy Stock Broking.
Regulatory issues easingThe recent favourable inspections at Sun Pharma's Halol plant, Cadila's facility and Dr
Securities.
Rupee depreciationDuring the June quarter, the rupee depreciated 3.8 per cent against the dollar and 12.7 per cent against the
It though appreciated against three BRICS currencies Russian Ruble, Brazilian Real and South African Rand, which could influence the EM
market growth for the firms
A 1 per cent depreciation of the rupee against the dollar has a benefit of average 1.1 per cent on Ebitda even as hedges and interest
payments may trim some of the benefits, BofA-ML said on its coverage stocks.
MA activity to pace upKarvy expects that the drug makers may
resort to divest ANDAs or businesses that lack core competence.
"We strongly believe that divestitures, mergers and acquisitions would be
the key driver of growth for the large generic pharma companies in India and the US
Timing of mergers and acquisitions may be uncertain, but will be primarily driven by the level of competition and valuations," it
said.
ValuationsThe valuation premium pharma stocks have enjoyed in the past over the benchmarks is falling, but analysts largely have mixed
views on whether the time is ripe for investors to invest in the sector.
"Consensus downgrades during the June quarter was 7-8 per cent for
The sector trades at 18 times rolling one-year forward earnings, implying a 10.4 per cent premium to Nifty versus 42.5 per cent a year ago,"
The brokerage expects Dr Reddy's , Cipla and IPCA to do well.
According to Sharekhan, many frontline stocks are still trading close to
their long-term average valuations following sharp downgrade in earnings estimates for the past six quarters
It prefers Biocon, Cadila, Cipla and Sun Pharma as investment options.
What to look atUpdates regarding FDA, key product approvals,
management commentaries and the exchange rate would be key in deciding earnings upgrades or downgrades, stated Sharekhan.
