Export-driven growth makes up for slowing domestic sales

Led by upsides from the new launches in the US, the Indian pharmaceutical sector is expected to report revenue growth of about 20 per cent year-on-year for the March quarter. The large chunk of the growth from the US geography (expected at between 35-40 per cent y-o-y) is likely to come from Sun Pharma, Aurobindo and Glenmark.

While US sales are expected to be strong, revenue growth from the domestic market is expected to be muted, given the sub-10 per cent sales in the first two months of the current year. While recent growth numbers don't look encouraging, Kartik Mehta and Chaturya Aggarwal of ICICI Securities believe growth should improve to 12-13 per cent.

Among the companies expected to do well is Sun Pharma, boosted by launch of Doxil, gains from price hikes and from the acquisitions of Dusa Pharma and the generics business of URL. Strong US market share gains across key products and above industry growth levels in the domestic market should also aid Lupin to outperform, believes Barclays Research.

Operating profit margins are expected to jump about 150 basis points (bps) to about 25 per cent. In addition to a low base, growth on the profitability front is due to a better product mix and better utilisation of newly-expanded facilities. Higher tax rates are expected to keep net profit growth at 19 per cent due to a higher tax rate on the imposition of minimum alternative tax on partnership-based manufacturing facilities and a sunset clause for export-oriented units (EOUs), say analysts at Sharekhan.

Going ahead, analysts believe growth rates are likely to be maintained in FY14. Hitesh Mahida of Fortune Research expects the growth momentum to continue to be led by limited competitive launches in the US by Indian generic players, robust growth in the domestic market and increasing penetration in key emerging markets. He believes healthy balance sheets should aid in inorganic growth.

What could put a lid on the high growth prospects for the sector is the new pharma policy, which could impact revenues and margins. Market share of companies that have products coming under pricing control will be volatile when the Pharma Pricing Policy is implemented in FY14, say Mehta and Aggarwal.

Given its defensive nature, the sector outperformed the Sensex in the March quarter, giving returns of two per cent as against the decline of four per cent for the Sensex. The outperformance could be maintained if pharma companies are able to beat result expectations.