Pharma Sector – Q1FY14 Preview

The pharma sector comes on the investors’ radar due to the crash in the broader market. The sector has seen rich valuations and the shares too were headed towards all-time highs in the June 2013 quarter. It has, however, come under pressure on the bourses due to the FDA issues in the US market as well as the new pharma pricing policy in the domestic market. The pharma index gained by 10% during the quarter but has lost by 4% from the high it recorded in May 2013.

The sector reported topline and bottomline growth of 16% and 29% respectively in Q4FY13. The gross margins also improved by 100 basis points. The momentum is likely to continue with further improvement in the Q1FY14 revenues and earnings. The rupee has also depreciated a lot in the last two months which will help the pharma companies going ahead.

Following are some stock specific views:

Sun Pharma: The company outperformed market expectations in the last quarter. This momentum is expected to continue in the quarter ending June 2013 due to the consolidation of URL pharma and Dusa pharma. The market is, however, concerned about the USD 550 billion settlement fee that Sun Pharma is to pay Pfizer. This is a very high amount and will impact the company’s ability to acquire Meda pharma that it had been in talks with as per media reports. Nevertheless, the negatives in the stock seem lesser but the earnings seem to be discounted at the moment. We estimate a price target of Rs 1125 in the next one year.

Lupin: Lupin too outperformed market expectations in the last quarter. We remain upbeat on the company’s ability to monetise its products’ pipeline. Moreover, its CFO has said that it will launch over 100 products in the next 3 years. It has also got a significantly big pipeline of potential first to file drugs which will give it a good amount of revenues in the future. During Q1FY14, the company reported fantastic growth in its US and Japanese revenues. India revenues were also significantly up and hence we remain optimistic on the stock.

Dr Reddy's Laboratories: The stock has shown a dream run on the bourses this year. The stock is up 22% YTD. During the quarter, it appreciated by 25%, which means it has discounted the Q1 earnings. We remain upbeat on the company as it derives 80% of its total revenues from the exports markets and hence the rupee impact will favour its earnings. We see a price target of around Rs 2500 implying around 12% upside from the CMP.

Aurobindo Pharma: The company, post the US FDA issues and FCCB redemption, has come out as a successful player. In the last quarter, it did very well on the operating front but the net profit came in flat on a YoY basis due to forex gains in Q4FY12. There could be some pain on the forex front due to rupee depreciation but at the same time gains in revenues would partially make up the impact on the translation front.

Cipla: Cipla shares, during the quarter, surged only by 4% reflecting a poor performance. During the quarter, the company reported 5% growth in its revenues and 8% decline in the net profit. Cipla derives over 41% revenues from the domestic market and hence the impact of the new pharma pricing policy would be seen on the company.

Cadila Healthcare: Cadila' performance in Q1 has not been very robust. The net profit came in higher only due to the tax write back. Sales were up by 16%. The stock is down by 13% on a YTD basis. It also received an approval for Lipaglyn, the first new chemical entity in the country. The market, however, was expecting something big but turned out to be a low key event.

Ranbaxy Laboratories: The stock has been under pressure due to the US FDA related issues as well as the inquiry of its plants by Indian FDA. The company reported lower revenues and earnings due to a higher base impact of Atorvastatin in the similar quarter last fiscal. The company, in its June 2013 quarter results, will also comment on the progress related to the audits by the Indian regulatory authority. It is best to avoid this stock in spite of the cheap pricing.

Wockhardt: The market has given a very strong negative reaction to the stock following an alert on its Waluj manufacturing facility. The company also has attracted Indian drug authorities for an inspection of the manufacturing capacity as per media reports. In Q4FY13, it reported fantastic numbers but the markets are cautious on the stock as more than USD 100 million would be wiped out of its revenues in FY14. Besides, the company has also not come up with any new development. Nevertheless, Q1FY14 would be a very important quarter as the company would be able to report the exact impact on its revenues. Also, there will be clarity on it’s the impact of the alert on its product pipeline. We would put a cautious ‘buy’ on the stock and advise investors to sell on small gains.