After strong Q1, drug firms' revenue growth to dip to 7%, say analysts

The first quarter (Q1) of this financial year was a strong one for pharmaceutical players, driven by 28 per cent domestic growth on a GST-disrupted base. Analysts, however, expect the Q2 FY19 domestic revenue growth to fall to 7 per cent due to GST restocking in the base quarter (Q2 FY18). GST de-stocking began a quarter before the implementation.
 
Currency played an important role in Q2, with US dollar, Japanese yen and euro appreciating vis-a-vis the Indian rupee, while the Brazilian real, South African rand and Russian ruble depreciating against rupee. On a sequential basis, export-driven firms are expected to report improved Ebitda margins. “Firms like Sun Pharma, Cadila Healthcare, Lupin, Aurobindo are likely to see improvements in Ebitda margins, thanks to the rupee depreciation,” said Amey Chalke, analyst with HDFC Securities. He said almost 80 per cent of the exports by big firms are in dollar denominations. Chalke also said that the rise in prices of active pharmaceutical ingredients was largely offset by the depreciating rupee, which helped exports. Analysts at Edelweiss Securities said that the overall revenue for Q2 is likely to grow at 9 per cent or so year-on-year, while the profit after tax is estimated to decline by 1.5 per cent versus 85 per cent y-o-y growth in Q1 FY19.
 
The domestic market growth rate has slowed down off late. Data from market research firm AIOCD AWACS showed that in September the market grew by 7.5 per cent y-o-y, against 8.7 per cent y-o-y in August and 12.7 per cent y-o-y in July. The volumes remained flat, and new introductions grew 2.5 per cent or so. Weak volume growth on a y-o-y basis was due to inventory restocking in the base quarter.
 

This will be the fifth straight quarter with a positive sequential top line growth for the big players. “With 9 per cent fall in rupee and stabilising US base business, coverage Ebitda margin is likely to increase 120 bps quarter-on-quarter (20.8 per cent) in 2Q FY19. On y-o-y comparison, the universe growth would remain subdued at 7.4 per cent and margin to decline on a high base of 2Q FY18 (affected by GST restocking),” HDFC Securities said.
 
On the US front, the approval rate from the US Food and Drug Administration remained steady during Q2, with over 200 abbreviated new drug applications approved for the second consecutive quarter.
 
Key approvals included generic ToprolXL, generic AsacolHD for Cadila and Xelpros for Sun. US regulatory action, however, picked up with six major inspections in Q2 at Sun’s Halol and Mohali plants, Cadila’s Ahmedabad and Liva (Vadodara) plants, Lupin’s Tarapur plant, Glenmark’s Baddi and Cipla’s Goa plants.