Mr. Param Desai-Senior Research Analyst at Prabhudas Lilladher
We expect pharmaceuticals companies under our coverage to report moderate EBITDA growth of 5% YoY (down 9% QoQ) led by continued pressure on margins due to 1) higher input cost, 2) higher freight cost (shortage of container availability) and 3) lack of meaningful approvals in US which would partially be off-set by market beating growth in Domestic business. In 4Q, our Pharma universe's domestic business will show stable growth and US business will remain broadly flat QoQ in Q4FY22. Cost pressure to remain elevated with higher freight and shipping cost on YoY basis, the geopolitical issues impacting Russia and CIS sales, lockdown in China resulting in increased API / Solvent prices which may adversely affect gross margins.
Amongst PL universe we expect companies like Cipla, Divi's and Sun to report strong YoY EBITDA growth of 24%, 31% and 20% respectively aided by ramp up in US market and COVID related opportunities respectively. On other hand ARBP and Lupin will see YoY decline in EBITDA, led by weak margins. Ipca and DRRD is likely to report muted EBITDA growth of ~2% YoY impacted by lower sales from CIS along with weak margins. Indoco to see strong YoY growth aided by higher regulated market sales and low base.
- US sales - Flat QoQ: We expect US sales to remain steady QoQ with continued challenging environment and lack of meaningful approvals. Sun Pharma's specialty sales are likely to increase in Q4FY22 as traction in WINLEVI product continues. Given lack of meaningful approvals and continued price erosion in base business, we see YoY decline in US sales for Zydus, GNP and ARBP.
- Russia-Ukraine War Impact: Among our coverage universe, DRRD and IPCA will be most impacted due to geopolitical tensions between Russia and Ukraine. DRRD sales to Russia + Ukraine accounts for ~10-11% of its consolidated revenues. Ipca sales accounts ~3% of consolidated revenues to CIS countries. However, there has been increase in prices to compensate depreciation of RUB. For Q4, we have factored in 21% YoY decline in Russia sales for DRRD and 31% YoY decline in branded generics for Ipca. There couple be possible offtake of lower volumes in FY23 due to weakness in economy. Resultant our EPS for DRRD reduced by 7%/ 5% for FY23E/ FY24E while EPS for Ipca reduced by 7% and 2% for FY23E and FY24E.
- Sectoral in consolidation mode: BSE Healthcare Index underperformed Sensex by 8% during Jan-Mar22 quarter. While sector may continue to underperform in near-term, long-term sectoral outlook remains positive led by tailwinds in US generics, healthy domestic formulations segment and easing of freight cost and API prices. We expect profitability to improve in FY23, with steady domestic business, strong launches in US market and continued cost optimization. We prefer companies with steady domestic franchises and strong US visibility. Our top picks remain SUNP, CIPLA, TRP and IPCA