Pharmaceuticals Sector: Q3FY14 Results Preview

For the 3 months ending December 2013, the S&P BSE Healthcare index gained 4.75% as compared to a 8.84% gain in the Sensex. This was because market participants shifted focus towards riskier sectors in this period as compared to safer havens like pharma. For example, the S&P BSE Realty and Metal indices rose by 21% and 17% respectively.

However, the picture appears quite different when we look at the returns on a yearly basis. In CY2013, the BSE Healthcare index yielded a staggering 22.50% returns, outperforming the frontline indices as well as Realty and Metal, which are actually down by 32% and 10% respectively from the start of the year.

The report card of the companies in the sector for the first half of the current fiscal too was cause for envy for other sectors. In the last quarter ended September 2013, if we look at an aggregate basis and after adjusting for the loss posted by Ranbaxy Laboratories, we see that the bottomline of the sector had witnessed a growth of 5.21 per cent on a YoY basis and a stupendous 50 per cent on a sequential basis. With the same criteria, the topline has grown by 12% on a YoY basis and 10.84% on a sequential basis.

The previous quarter (Q2FY14) saw the domestic formulations business of most of the companies remain muted, but exports helped the sector post gains. Most of the companies had revised their guidance upwards, which was an encouraging sign. Further upgrades in the coming quarter cannot be ruled out when the companies come out with their Q3FY14 results.

Let us take a look at the few factors that will play a part in helping the companies posting better results. First is the appreciation of the rupee. Many will raise questions on this, as a major part of the revenues for the sector come through exports. But the appreciation of around 1% that the rupee has seen against the USD will benefit players like Ranbaxy Labs and Aurobindo Pharma in a big way, as they have significant exposure to foreign currency loans. With the kind of appreciation that the INR has seen during the quarter, we also do not foresee any significant downfall in the value of exports.

The second significant factor will be the improvement in margins. The levying of the NPPP(National Pharmaceutical Pricing Policy) coupled with rising raw material prices had earlier appeared to be a threat to the prospects of the company. In reality, however, there will be little impact of the NPPP as the price reduction has been made up for by the rising volumes. Also, the kind of ANDA and FTF filing pipeline that the Indian companies have would negate any negative impact caused by the aforesaid two reasons.

It appears that we are set to see some positive results from the sector again, and an aggregate topline growth of 13%-15% cannot be ruled out. Keep a close watch on the results of companies such as Sun Pharma, Lupin, Ipca Laboratories, Dr Reddy's, Biocon and Divi's Laboratories. We feel that GSK Pharma may witness some drop in the revenues as it took the hit of price cuts in their major brands as well as trade-related issues in the domestic market.

In sum, we are hoping to see better results from the sector and maintain our bullish stance at this juncture. Any change in ratings on the sector will be taken when the results of all the companies are made public.