KRChoksey has come out with its report on pharma sector. According to the research firm, Dr Reddys, Lupin and Granules India are the top picks, one can expect mixed bag performance in the space, says the report.
Earnings expectation
We expect our Pharma Universe to cumulatively post top line growth of 10% YoY majorly impacted by currency depreciation in Emerging markets. However key launches in US market by some of the large caps & rebound in domestic market will offset some of the impact. We expect operating margins to sustain around 28% YoY. We expect PAT to grow by 20% YoY driven by higher operating margins backed by key product launches by some of the large cap companies. Revenue & EBITDA growth on QoQ basis is likely to be flat due to high base effect. Large caps excluding Ranbaxy under our coverage are expected to cumulatively post a top line growth of 11% YoY with EBITDA margins of 30%. We believe higher MTM forex losses on loans or derivatives will have an impact on some of the players. In Midcaps, we expect Granules India to show flat revenue & EBITDA growth sequentially due to lower sales from Auctus on account of shutdown of Vizag plant (hudhud cyclone) for two weeks during the quarter. We believe Unichem's earnings will be impacted by weak domestic business growth on account of lower volume growth in its chronic portfolio. However Export formulation will show better performance.
We believe Sales & earnings of Ranbaxy to be driven by Diovan exclusivity & rebound in domestic business. Base business margins will still be in single digits on account of increased regulatory cost. We expect revenues of Cipla to be driven by strong domestic growth & Celebrex API supply to Teva.
We believe strong revenue growth & stable margins to be posted by Lupin on account of strong domestic market & recent launch of Celebrex in US market.
Sun Pharma's revenues will be mainly driven by strong domestic business. We expect sales from Taro to be around USD 230-235mn However ex Taro, market share loss in Doxycycline, Sumatriptan Auto-injector & slower approvals to impact US growth.
We believe Dr Reddy to post flat growth impacted by lower Russian market growth on account of Rouble depreciation. However, strong domestic growth & recent launch of Valcyte might offset some of the impact. Cadila's performance to be driven by increased traction in AG launches in US market & price hike taken on one of its product.
Sector outlook & View
"We remain bullish on pharmaceutical stocks from medium to long term perspective as they are focusing on niche products in US which are low competition market, rebound in domestic market & ramp up in emerging markets. We believe domestic market will continue to remain as cash cow for almost all domestic leaders led by 10-15 new launches annually & MR hiring's. We believe strong outperformance will be on back of unfolding regulated markets with focus in complex therapies like derma, injectables, transdermals, biosimilars etc by creating capacities & investment in R&D. Although currency devaluation in Russia & structural problems in Brazil will remain an overhang on the sector, these are not big and hence will not deter the strong sector outperformance", says KRChoksey research report.
Top Picks: Dr Reddys , Lupin , Granules India
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To read the full report click here
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