Pharmaceutical sector likely to report moderate growth in Q4 earnings

The pharmaceutical sector is likely to report moderate growth in the fourth-quarter earnings on fewer abbreviated new drug application (ANDA) approvals in the US and emerging market (EM) currency headwinds.

In a report on the pharma companies under its coverage, international broking firm Bank of America and Merrill Lynch (India) said, "We expect the fourth quarter growth momentum to be moderate with profit after tax up 10% (28-45% till first quarter 2014-15). This will mark a third straight quarter of moderate growth on fewer ANDA approvals (US) and EM currency headwinds; the risk to 2015-16 earnings is higher. While we see most of these as transient, they could pose a risk to premium valuations if they persist."

According to Mumbai-based Edelweiss Securities, the core revenue growth is estimated at 12% for its coverage universe, slowest growth in many quarters. "The US will remain key growth driver, albeit at a slower pace (approximately 6% in the fourth quarter of 2014-15 versus 22% in the nine months of 2014-15) due to slowdown in ANDA approvals and impact of customer consolidation. India will remain strong on low base of previous year," the report said.

Sharekhan, another brokerage, said in its report, "Most of the pharma players are expected to show a moderate performance, mainly due to adverse cross-currency movement, fewer product approvals for the regulated markets, and political instability in the Middle-East and the CIS region."

According to brokerage KR Choksey, the drug makers are likely to post topline growth of 11% year on year cumulatively, aided by recovery in domestic market growth on back of ramp-up in new product launches and traction in market-share gain in existing launches. "We expect operating margins to sustain around 26.7% yoy. We expect PAT to grow by 13% yoy, driven by higher operating margins backed by ramp-up in existing complex molecules launched by some of the large-cap companies. We believe mark-to-market forex losses on loans or derivatives will have an impact on some of the players due to currency fluctuations," it said.

The BofA Merrill Lynch report said, "The US is the largest contributor to sales/profitability at Indian generics companies. Introduction of new products is a key growth driver and slowdown in approvals could significantly hurt sector growth. While we are optimistic on the approval cycle ramp-up in the long run, near-term earnings could be at risk (14-28% of US growth dependent on new launches, 2-5% of overall). On the other hand, a strong US dollar could be a near-term catalyst (5% rupee movement will impact earnings per share by 2.4-5.6%)."

However, the domestic market remained bullish for most pharma players during the March quarter. Brokerage Prabhudas Liladher said, "We expect the diminishing effect of the new Drug Price Control Order (DPCO) Act 2013 to continue to benefit growth in domestic formulation sales. We believe that strong price rise and volume growth in non? DPCO drugs will be the major reason for growth as non?DPCO drugs contribute 82% of market value of domestic formulations. Though, the price rise in DPCO drugs is limited, this would be partial booster for domestic sales growth of Indian generic companies in our coverage universe."

Karvy Stock Broking said, "The domestic formulations business has witnessed better growth of 6.9% during January and February 2015 compared to 0.8% in the third quarter of 2014-15. Majority of the companies having presence in domestic formulations have done well on secondary sales numbers with the exception of Glaxo Pharma and Lupin."