Pharma cos to witness 26% core sales growth in Q3: BofAML

Pharmaceutical sector may witness a core sales growth of 26% in the third quarter of FY 2014 Bank of America Merrill Lynch said in a report.

"We expect growth momentum for the pharma universe to sustain with core sales growth of 26%, EBITDA growth of 37 per cent and PAT growth of 40 per cent. Revenue growth will largely be driven by continued momentum in the US, strong growth in RoW markets, higher currency realisation (up 14% YoY), and strong margin traction will drive bottom line growth in Q3," the report said.

"On the domestic front, after two quarters of dismal performance due to trade channel disturbances, we see some recovery in volume with double-digit growth for the quarter. Core EBITDA margins are likely to expand by 180 BP (basis points) to 23.8 per cent, driven by higher contribution from niche launches, improved product mix, and currency benefits," it said.

BofAML said it sees strong base business growth at Sun, Dr Reddy, Lupin and Aurobindo Pharma. The increasing number of limited-competition products is rendering higher sustainable growth to the base business.

"We see continued accretion from limited competition/complex products including Lipodox and Doxycycline of Sun Pharma, Tricor and Zymaxid of Lupin, Vidaza, and Dacogen of Dr Reddy. We believe incremental launches in niche segments will continue to drive growth in the ensuing quarters," it said.

While a price cut on NLEM (National List of Essential Medicines) products will impact margins in the domestic business, most firms have already hiked prices on non-NLEM products and hence margin compression will be limited to a few large affected players, DSP Merrill Lynch (India) Research Analyst Manoj Garg said.

The core margins are expected to expand by 180 basis points to 23.8% in the third quarter. "Despite low contribution from domestic market, we expect core operating margins to expand by 180 basis points to 23.8%, led by higher contribution from niche launches, improved business mix, and favourable currency. We see strong margin expansion for Dr Reddy (up 300 basis points year-on-year) and Aurobindo Pharma (up 330 basis year-on-year)," Garg said.

"We see strong traction in Sun Pharma, Dr Reddy, Lupin and Aurobindo, while Ranbaxy, Glenmark and Cadila will have moderate performance during the quarter. On Cipla, we expect improvement in both top and bottom line because of the low base effect and consolidation of Cipla Medpro and expect operating leverage to kick in in the next 1-2 quarters," the report said.