Pharma: Healthy performance

Most pharmaceutical firms are likely to report robust numbers for the December quarter, though a strong rupee may hurt.

Although considered a defensive bet, the pharmaceutical sector has been one of the best performers in the current financial year. In the December 2010 quarter, the Bombay Stock Exchange (BSE) Healthcare Index rose 12.3 per cent, outperforming the Sensex’s 2.83 per cent rise.

The outperformance comes on the back of improving prospects of companies getting regular approvals from the Food & Drug Administration for generic launches, product marketing arrangements with multinational companies, both for semi-regulated and regulated markets, and strong domestic growth.

For the December 2010 quarter, though the earnings outlook is bright, a rising rupee may hit companies. The rupee has appreciated 3.9 per cent year-on-year (y-o-y) against the dollar and 11 per cent against the euro during the quarter. Analysts at Motilal Oswal estimate 17.2 per cent y-o-y growth in the top line (excluding one-offs) of the pharma universe (around 15 leading Indian players). Earnings before interest, taxes, depreciation and amortisation (Ebitda) are expected to appreciate 17.2 per cent, with adjusted net profit rising 147 per cent year-on-year.

While profit growth will largely be contributed by Dr Reddy’s Laboratories and Ranbaxy, both of which did not see a good December 2009 quarter due to write-offs and adverse currency movements, overall Ebdita growth is likely to be driven by Sun Pharma, Divis Laboratories and Tier-II generic companies like Strides Arcolab, Biocon, Glenmark Pharma and Lupin on the back of their improving product mix.

Among midcaps, Cadila Healthcare is set to post a good set of numbers, backed by 19.4 per cent domestic growth and a 18.2 per cent rise in exports. According to Angel Broking estimates, strong domestic and export growth may also drive Indoco Remedies revenues to Rs 121.7 crore (up 27.2 per cent year-on-year).

The performance of the CRAMS (contract research and manufacturing services) segment continues to be affected by inventory rationalisations and global mergers. While the December 2010 quarter may not be good for players in space, a recovery is likely in the March quarter, reckon analysts. Dishman Pharma remains the top pick in the segment, according to analysts.