Q2FY23 preview: Modest revenue growth, Ebitda decline seen in pharma cos

While domestic market demand is strong, analysts expect higher raw material and freight costs to affect business in US, other countries; healthy YoY growth seen in hospitals and diagnostics

Analysts expect that pharmaceutical companies will likely report modest revenue growth in the July-September quarter (Q2) of FY23, but their earnings before interest, tax, depreciation, and amortisation (Ebitda) will decline due to a high base and normalised expenses.

Though domestic market demand is strong, analysts expect that higher raw material and freight costs will impact business in the US and other countries.

Recovery in the base business may help hospitals and diagnostics post healthy year-on-year (YoY) growth. “Hospitals are likely to report robust operating performance, driven by rising occupancy, stable average revenue per occupied bed (ARPOBs), and traction in international patients. Diagnostics would benefit from seasonality. Overall performance stays bleak amid heightened competition,” Edelweiss Securities said.

According to ICICI Securities analysts, pricing pressures in the US have started to ease with the expectation of normalcy in the coming months. "We expect the Ebitda margin of our coverage companies to decline by 240 basis points (bps) YoY to 20 per cent,” it said. Edelweiss, too, pointed out that US price erosion was marginally receding, and that improved launches would ease gross margins.

Dr Reddy’s Laboratories (generic Revlimid), Lupin (generic Suprep), Sun Pharma (specialty), and Cipla (respiratory) are seen gaining share in the US market.
 

Prabhudas Lilladher analysts, however, predict robust sequential growth aided by niche launches in the US, steady domestic formulation business, and easing of overheads like freight and commodity prices. "The benefit from the rupee depreciation versus the dollar (+7 per cent YoY and 3 per cent QoQ) will also help profitability. On the flip side, currency volatility in emerging markets will negatively impact profitability,” the said.

According to Edelweiss, the domestic momentum remains strong and Torrent Pharmaceuticals, Ajanta Pharmaceuticals, and Sun Pharmaceutical will lead in this segment. Domestic price hikes and easing input costs would improve gross margins by 100 bps QoQ, it said.

Torrent Pharmaceuticals’ India business grew 13 per cent YoY during the quarter to Rs 1,224 crore. According to AWACS, Torrent Pharma’s growth in Q2 was 19 per cent versus the Indian Pharmaceutical Market (IPM) growth of 13 per cent.

IQVIA data for July-September 2022 shows IPM grew 8.2 per cent YoY in value terms. Volumes were flat YoY during Q2FY23. ICICI Securities said acute segments witnessed subdued growth during the quarter. While anti-infectives grew 7.2 per cent, respiratory was up 4.2 per cent YoY. Chronic products segment drove sales in the market — cardiac, neurology, and anti-diabetic grew 10.1 per cent, 9.8 per cent and 7.8 per cent, respectively.

Hospitals, on the other hand, are on strong footing this quarter.

According to Edelweiss, Apollo Hospitals’ occupancy returned to 64 per cent in June following a tepid April and May, and it was sustained in Q2FY23.

“Fortis Healthcare's hospitals have recovered well, with 67 per cent occupancy, but that is marred by poor SRL performance. In diagnostics, (there is) some respite due to the strong season, but growth is still likely to be below pre-Covid. Moreover, increased competition may intensify the pressures on prices,” the analysts said.

Dr Lal Pathlabs' overall revenues (excluding Suburban Diagnostics) are expected to increase by 1 per cent YoY due to the high Covid-19 base.

“Excluding Covid-19, it is expected to grow 11 per cent YoY due to improved volumes in the industry. We build in Suburban revenues for a full quarter of Rs 44.6 crore with a low margin profile. As a result, Ebitda margins (after ESOP) are likely to be 25 per cent, a 340-bp decline YoY but an improvement of 160 bps QoQ,” Edelweiss said.