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Pharmaceuticals: June quarter shows the way

Malini Bhupta/Mumbai 24 Aug 12 | 03:56 AM

Stock picking isn’t easy, especially when profitability of the country’s top 30 companies plummeted to single-digit levels. Strategists say there is a “drought of ideas", as few sectors are likely to report strong sales and profit numbers through 2012-13 and 2013-14. The pharmaceutical industry is likely to be an exception in this environment of gloom, as it’s expected to sustain annual sales growth of 15-16 per cent for the next few years.

HSBC Securities has forecast compounded annual growth rate of 21 per cent for the sector during the FY12-FY14, and this would be driven by robust growth in generics.

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The numbers for the quarter ended June suggest the forecast isn’t aggressive. In the quarter ended June, the sector reported sales growth of 36 per cent and a 58 per cent growth in operating profit. The profitability of the sector got a major boost from the 21 per cent year-on-year depreciation in the rupee. According to Edelweiss Securities, the core earnings before interest, taxes, depreciation and amortisation margin soared 240 basis points year-on-year and 150 basis points quarter-on-quarter, driven by an improved product mix and better currency realisations.

What has surprised most is the robust 24 per cent growth in the domestic market. This market had seen a slowdown in the acute therapy segment in FY12. However, it recorded a recovery in the quarter ended June. Though there is a risk of price regulation in the domestic market, analysts believe companies with a high number of chronic therapy drugs in their portfolio would be able to withstand pricing controls.

Also, with several blockbuster drugs going off-patent globally, generics companies are reaping rich dividends by launching these drugs in the US. Ranbaxy has seen its profitability rise by the launch of Lipitor in the US. While large companies would benefit from big generic launches in the US, these would also outsource some requirements to mid-cap firms.

The Street is willing to pay top dollars for large companies, though valuations appear rich. Most analysts prefer Dr Reddy’s, Cipla and Sun Pharma in the large-cap space. Though analysts were disappointed with Dr Reddy’s numbers, HSBC Securities expects better US sales in the second half of 2012-13, owing to an upside from new launches. Edelweiss feels companies with strong pipelines and differentiated portfolios would sustain growth beyond FY13. Among large-caps, Lupin, Cipla and Cadila are the brokerage’s preferred picks.

Comments

    06 Sep 12 at 08:57 AM
By: vijen bhatt

Pharma sector in India will definitely grow because of the culture we are adopting. So, picking up stock which have strong presence in Euro as well as US market will give good returns.



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