Hardick Bora (Hardick.Bora@MotilalOswal.com); +91 22 3982 5423 Aggregate core EBITDA to grow 13%, adj. PAT to grow 11% INR depreciation to aid operations; higher taxes to impact PAT growth
Expect aggregate core EBITDA to grow 13% YoY For 1QFY15, we expect core sales growth of 16% YoY and core EBITDA growth of 13% YoY for our Healthcare Universe (excluding one-offs). Adjusted PAT is likely to grow 11% YoY, mainly due to higher taxes. High base effect would impact operational performance for most companies.
Higher contribution from recently launched products in the US and better sales mix would drive growth for Dr Reddys, Lupin, Cadila Healthcare, and Alembic Pharma. Increasing contribution from branded business is likely to drive operational performance for IPCA Labs. Biocon is likely to report high growth due to lower R&D expenses. Both MNCs under our coverage, Sanofi India and GSK Pharma, would report healthy operational performance due to increase in prices of products exiting price control and low base.
Favorable currency movement should favorably impact operating performance for the rest of our Healthcare Universe. A sequentially flat INR against the USD may lead to insignificant MTM impact from monetary forex liabilities. Yet, due to higher taxes, adjusted PAT would grow slower than core EBITDA.
Expected quarterly performance summary (INR m) Sector CMP Sales EBDITA Net Profit
Company name Alembic Pharmaceuticals Biocon Cadila Health Cipla Divi's Laboratories Dr Reddy s Labs Glenmark Pharma GSK Pharma Ipca Laboratories Lupin Ranbaxy Labs Sanofi India Sun Pharma Torrent Pharmaceuticals
June 2014 Results Preview | 9 July 2014
Healthcare Investors are advised to refer through disclosures made at the end of the Research Report.
Core 1QFY15 performance: Key highlights We expect Dr Reddys, Lupin, Cadila Healthcare, IPCA Labs, Biocon, and Alembic Pharma to record strong operational performance. We attribute the following company-specific reasons for this performance: Dr Reddys: We expect Dr Reddys to report strong growth of 61% in core EBITDA, driven by a robust 33% growth in US base business and higher contribution from low competition launches like gDacogen, gReclast, gVidaza. The company will also benefit from low base effect. We expect core EBITDA margin to expand 550bp YoY to 23.5%. Lupin: Lupin is likely to witness 44% YoY growth in core EBITDA, as improving product mix in the US started driving up margins post 2QFY14. Cadila Healthcare: Uptick in recent launches and contribution from authorized generics opportunities is likely to result in 50% growth in US sales. EBITDA margin is likely to expand 50bp YoY due to benefit of operating leverage and improving sales mix. IPCA Labs: We expect sales growth momentum to continue, aided by 27% growth in export formulations. Improving sales mix aided by higher contribution from branded exports could result in EBITDA margin expansion of 280bp YoY. Biocon: Slowdown in R&D activity is yet again likely to result in lower R&D expenses. As such, we expect Biocons EBITDA margin to expand 100bp YoY. Alembic Pharma: We expect revenue to grow 18% YoY, driven by increasing contribution from recent launches in the US generics market. With improving business mix, EBITDA could grow 27%. MNCs: We expect GSK Pharma and Sanofi India to report healthy operational performance due to price increases in products exiting price control and low base effect.
Key developments Sun Pharma announced acquisition of 100% stake in Ranbaxy for USD4b The transaction would be an all-stock deal, resulting in 16.3% dilution for Sun Pharma shareholders. Promoter stake would reduce to 54.7%. Ranbaxy shareholders would receive 0.8 shares of Sun Pharma for each Ranbaxy share. Consequently, Daiichi Sankyo would become the largest shareholder in Sun Pharma, with a stake of 9%. This transaction would make Sun Pharma the largest pharma company in India, the largest Indian pharma company in the US, and strengthen its presence in emerging markets. The transaction is likely to be closed by the end of 2014. The acquisition would add to Sun Pharmas cash earnings per share in the first full year. Sun Pharma June 2014 Results Preview | Sector: Healthcare
9 July 2014 3
expects to realize revenue and operating synergies of USD250m by the third year post closing of the transaction.
Ranbaxys exclusive copy to finally see light of day Ranbaxy received FDA approval for its generic version of Diovan on 26 June 2014. This approval paves the way for the company to exercise its 180-day exclusivity on the USD2.2b opportunity. We estimate that the product could generate one-off sales of ~USD100m and INR7/share of one-time profit for Ranbaxy over the exclusivity period. Our expectation is based on the assumption that Novartis will introduce an authorized generic version through its generics unit, Sandoz. This development also increases the likelihood of Ranbaxy capitalizing on other FTF opportunities gValcyte and gNexium.
INR depreciation to aid operations; minor MTM impact from forex liabilities On an average, in 1QFY15, the INR depreciated 7% YoY against the USD. We expect companies with largely unhedged net exports to realize the benefit of favorable currency at the EBITDA level. Companies that are likely to benefit the most include Alembic Pharma, Biocon, Cadila, Divis Labs, IPCA, and Dr Reddys. The INR/USD exchange rate has remained flat QoQ. There would be no significant MTM impact for companies with large forex liabilities.
25.6 20.8 17.6 15.4 13.3 11.2 20.1 20.6 20.4 46 53 60 67 74 A p r - 1 3 M a y - 1 3 J u n - 1 3 J u l - 1 3 A u g - 1 3 S e p - 1 3 O c t - 1 3 N o v - 1 3 D e c - 1 3 J a n - 1 4 F e b - 1 4 M a r - 1 4 A p r - 1 4 M a y - 1 4 J u n - 1 4 J u l - 1 4 June 2014 Results Preview | Sector: Healthcare
9 July 2014 4
Quarterly Performance (Consolidated) (INR Million) Y/E March FY14
CMP: INR310 Buy We expect sales to grow 18% YoY to INR5.1b, led by 60% growth in international generics. While the domestic formulations business is likely to grow 10% YoY, total API revenues would be flat. EBITDA is likely to grow 27% YoY to INR909m, with EBITDA margin up 130bp to 18%, aided by recently launched products in the US generics market and improving sales mix in domestic formulations. We expect adjusted PAT to grow just 31% YoY to INR612m, primarily driven by strong operational performance. We believe ALPM has a focused management team in place and has stepped into its next phase of high growth. The strong improvement in operational performance over the last few quarters, we believe, is but an undertone of this transformation. Business mix is likely to improve further, with higher contribution from US generics and specialty therapies in India, while low-margin APIs and acute therapies may continue to face slowdown. The stock trades at 19x FY15E and 14.3x FY16E EPS. Maintain Buy. Key issues to watch for Upside from Micardis HCT launch Outlook for domestic formulations and US generics business
Bloomberg ALPM IN Equity Shares (m) 188.5 M. Cap. (INR b)/(USD b) 58 / 1 52-Week Range (INR) 317 / 118 1,6,12 Rel Perf. (%) 21 / 23 / 87
1,942 2,060 2,020 2,082 7,137 8,104 YoY Change (%) 26.3 45.7 31.0 13.3 25.6 9.5 10.4 10.7 28.1 13.5 E: MOSL Estimates; Note - Quarterly nos will not add up to full-year nos due to restatements
June 2014 Results Preview | Sector: Healthcare
Biocon
CMP: INR543 Sell We expect sales to grow 16% YoY to INR8b, led by 26% growth in CRO division. The Biopharma division is likely to grow 13%. We estimate licensing income at INR74m (INR76m in 1QFY14). EBITDA is likely to grow 21% YoY to INR1.8b, with EBITDA margin expanding 100bp to 22%. BIOS R&D activity has been moderating since 3QFY14, which is likely to result in lower R&D spend YoY. We expect adjusted PAT to grow just 23% YoY to INR1.1b, in line with operational performance. Key growth drivers for FY15/FY16 would be (1) traction in insulin initiative in RoW, (2) ramp-up in CRO division, (3) contribution from immuno-suppressant supplies, and (4) branded formulations. However, high R&D costs and long-term capex in the near term would put pressure on profitability and return ratios. The stock trades at 23.6x FY15E and 20.3x FY16E earnings. Option values for the future include separate listing of Contract Research business and potential out-licensing of the Oral Insulin NCE by BMS. Return ratios are likely to remain subdued, with both RoE and RoCE in the 13-14% range from FY13 to FY15. Maintain Sell. Key issues to watch for Update on initiatives to out-license Anti-CD6 Progress on product registration for Rh-Insulin in Europe/US Outlook for listing of Syngene
Bloomberg BIOS IN Equity Shares (m) 200.0 M. Cap. (INR b)/(USD b) 109 / 2 52-Week Range (INR) 554 / 277 1,6,12 Rel Perf. (%) 15 / -12 / 59
CMP: INR1,105 Buy We expect revenue to grow 23% YoY to INR20.1b, led by 50% YoY growth in the US formulations. Total export formulations would grow 37% YoY to INR8.6b. Domestic formulations would grow 10% YoY to INR6.9b, impacted by the new drug policy. EBITDA is likely to grow 27% YoY to INR3.6b, with EBITDA margin inching up 50bp YoY, aided by improving sales mix in the US. Adjusted PAT is likely to grow 24% YoY to INR2.4b, slower than EBITDA due to higher taxes. We believe CDH has made investments in the right areas and will unlock value at the appropriate time. We expect FY15 to be a year of recovery for CDH. New launches in the US would be an important trigger for the company for FY15. We estimate 17% EPS CAGR over FY14-17, with improving return ratios over the next three years. The stock trades at 23.8x FY15E and 19.5x FY16E EPS. Maintain Buy. Key issues to watch for Update on US launches from the Moraiya facility Outlook for recovery in domestic formulations Progress on improvement in balance sheet
Bloomberg CDH IN Equity Shares (m) 204.7 M. Cap. (INR b)/(USD b) 226 / 4 52-Week Range (INR) 1,144 / 631 1,6,12 Rel Perf. (%) 16 / 17 / 8
CMP: INR448 Neutral We expect revenue to grow 21% YoY to INR29.7b.
The domestic formulations business would grow 14% YoY to INR12.9b, while export formulations revenue would grow 39% YoY to INR14.4b, aided by consolidation of Cipla Medpro.
EBITDA is likely to decline 14% YoY to INR5.8b, with EBITDA margin likely to contract 7.9% YoY to 19.5% from a high base.
We expect adjusted PAT to decline 25% YoY to INR3.6b on account of higher depreciation and lower other income.
We believe the next few quarters would remain an investment phase, the benefits of which would come through only in FY16.
The stock trades at 25.8x FY15E and 19.1x FY16E EPS. Maintain Neutral. Key issues to watch for Update on launch of inhalers in Europe Improvement in profitability at Cipla Medpro
Bloomberg CIPLA IN Equity Shares (m) 802.9 M. Cap. (INR b)/(USD b) 360 / 6 52-Week Range (INR) 453 / 367 1,6,12 Rel Perf. (%) 10 / -10 / -20
CMP: INR1,527 Buy We expect revenue to grow 16% YoY to INR6b on increased capacity utilization at new the SEZ unit and favorable currency impact. Growth would be driven by both CCS and API businesses. EBITDA is likely to grow 9% YoY to INR2.1b, with 230bp YoY decline in margins as contribution of generics in near term is likely to remain higher. We expect PAT to decline 10% YoY to INR1.6b due to lower other income (forex gain of INR430m in 1QFY14). DIVI expects FY15 revenue to grow more than 20%, with EBITDA margin sustaining at 40%. Revenue growth would be aided by capacity utilization at DSN SEZ. We estimate 17% revenue, EBITDA, PAT CAGR over FY14-16, with EBITDA margin stabilizing at ~40%. We expect the balance sheet to continue strengthening, and expect dividend payout to go up from 40% in FY14 to 45% in FY15. The stock trades at 23.4x FY15E and 19.4x FY16E EPS. Buy. Key issues to watch for Ramp-up at Vizag SEZ Outlook for growth beyond FY15
Bloomberg DIVI IN Equity Shares (m) 132.7 M. Cap. (INR b)/(USD b) 203 / 3 52-Week Range (INR) 1,546 / 905 1,6,12 Rel Perf. (%) 19 / -2 / 25
CMP: INR2,679 Buy We expect 20% YoY growth in core revenue for 1QFY15 to INR34.2b. Growth would be led by 27% YoY growth in US revenue and 22% YoY growth in Russia/CIS. Revenue growth would be restricted by 12% growth in domestic formulations and 13% growth in PSAI segment. Core EBITDA is likely to grow 49% YoY to INR80b due to base effect and improving product mix in the US. Consequently, we expect EBITDA margin to expand 450bp YoY to 23.5%. PAT could see a growth of 46% YoY to INR5.2b, slower than EBITDA growth due to higher taxes. Adjusted for one-off contribution from gActos in 1QFY14, core sales should grow 23%, while core EBITDA and PAT grow 61%. Though FY15 is likely to be a muted year for DRRD, we believe accelerated launches in the US in FY16 could drive strong double-digit growth in FY16. The stock trades at 21.1x FY15E and 18.3x FY16E core earnings. Maintain Buy. Key issues to watch for View on pipeline of products in the US FY16 outlook for both generics and PSAI businesses
Bloomberg DRRD IN Equity Shares (m) 170.1 M. Cap. (INR b)/(USD b) 456 / 8 52-Week Range (INR) 2,940 / 2025 1,6,12 Rel Perf. (%) 11 / -17 / -13
CMP: INR602 Buy We expect Glenmark Pharmaceuticals (GNP) to post 15% YoY growth in core revenue (excluding one-offs and R&D income) to INR14.2b, led primarily by high growth in emerging markets and APIs. Reported sales would grow 17% YoY to INR14.5b. The branded business is likely to grow 20% YoY, while the generics segment would grow just 5% due to slowdown in the US. We expect R&D licensing income of INR299m from Sanofi (nil in 1QFY14). Core EBITDA is likely to be flat YoY at INR2.5b, with core EBITDA margin down 240bp YoY, impacted by adverse sales mix. Reported EBITDA would grow 13% YoY to INR2.8b. Adjusted PAT is likely to decline 16% YoY to INR1.1b, mainly due to higher depreciation. Reported PAT is likely to grow 5% YoY. We expect GNP to gradually reduce its net debt over FY14-16, resulting in improvement in D/E from 1.1x in FY14 to 0.7x by FY16. We also expect gradual improvement in return ratios. The stock trades at 22.4x FY15E and 17.9x FY16E EPS. Maintain Buy. Key issues to watch for Product pipeline for US Update on free cash generation and debt repayment schedule Progress of NCE/NBE pipeline
Bloomberg GNP IN Equity Shares (m) 271.2 M. Cap. (INR b)/(USD b) 163 / 3 52-Week Range (INR) 640 / 489 1,6,12 Rel Perf. (%) 7 / -8 / -29
CMP: INR2,548 Neutral We expect GLXO to report 8% YoY growth in 2QCY14 sales to INR6.9b. EBITDA is likely to grow 12% YoY to INR1.3b, with EBITDA margin expanding 70bp YoY to 18.6% on a low base. Growth and profitability would remain impacted by supply chain issues highlighted in CY13 and price revisions taken due to fresh price control implemented last year. We expect adjusted PAT to grow 23% YoY to INR1.2b, faster than EBITDA due to lower taxes. GLXO deserves premium valuations due to strong parentage (giving access to large product pipeline), brand-building ability, and likely positioning in the post patent era. It is one of the few companies with the ability to drive reasonable growth without any major capital requirement, leading to high RoCE of 45-50%. At 41.2x CY14E and 30.1x CY15E EPS, current valuations adequately reflect the recovery in business over this period. Maintain Neutral. Key issues to watch for Update on supply chain related issues Market performance of products impacted by DPCO 2013
Bloomberg GLXO IN Equity Shares (m) 84.7 M. Cap. (INR b)/(USD b) 216 / 4 52-Week Range (INR) 3,054 / 2,175 1,6,12 Rel Perf. (%) -1 / -39 / -36
CMP: INR881 Buy We expect revenue to grow 19% YoY to INR9.6b, led by 27% growth in export formulations. Domestic formulations would grow 16% YoY on a low base, while total API sales would grow 12% YoY. EBITDA is likely to grow 35% YoY to INR2.3b, aided by 280bp YoY expansion in EBITDA margin to 24%. This would be driven by higher contribution from international formulations. We expect adjusted PAT to grow 113% YoY to INR1.5b, boosted by higher other income (forex loss in 1QFY14). We expect significant ramp-up in IPCA's international formulations revenue, led by 36% CAGR in US generics and 33% CAGR in US business over FY13-16. Domestic formulations growth is likely to be maintained at 16%. We expect IPCA to clock EPS CAGR of 24% over FY14-17 on the back of 18% revenue CAGR, aided by 80-100bp EBITDA margin expansion and reversal of MTM losses. The stock trades at 18.1x FY15E EPS and 14.8x FY16E EPS. Buy. Key issues to watch for Ramp-up at recently approved Indore SEZ for US Outlook for institutional tender business after FY14
Bloomberg IPCA IN Equity Shares (m) 126.2 M. Cap. (INR b)/(USD b) 111 / 2 52-Week Range (INR) 907 / 609 1,6,12 Rel Perf. (%) 6 / 1 / -5
CMP: INR1,088 Buy We expect revenue to grow 23% YoY to INR30b, driven mainly by 27% YoY growth in advanced market formulations. Domestic formulations would grow 16% YoY, while RoW markets are likely to grow 23%. Core revenue excluding one-off upsides from generic Tricor, Trizivir and Niaspan is likely to grow 23% YoY to INR28.3b. EBITDA would grow 42% YoY to INR7.6b, with EBITDA margin expanding by 340bp YoY to 25.5%. Core EBITDA would be INR6.6b, with core EBITDA margin at 23.2%, up 350bp YoY, aided by improving sales mix in the US. Reported PAT is likely to grow 20% to INR4.8b, while adjusted PAT is likely to grow 69% to INR3.9b on a low base. Key growth drivers for FY15/FY16 would be strong product pipeline for the US, and higher contribution from oral contraceptives. Growth in India formulations is likely to rebound to 16% in FY15. The stock trades at 24.7x FY15E and 20.5x FY16E EPS. Maintain Buy. Key issues to watch for Outlook on future launches in the US Revival in constant currency sales growth in Irom Outlook on domestic formulations business post DPCO 2013
Bloomberg LPC IN Equity Shares (m) 447.5 M. Cap. (INR b)/(USD b) 487 / 8 52-Week Range (INR) 1,102 / 742 1,6,12 Rel Perf. (%) 13 / -8 / -6
CMP: INR534 Buy We expect a muted 2% YoY growth in sales to INR27.5b, impacted by slowdown in US generics and APIs. EBITDA is likely to decline 35% YoY to INR1.7b due to discontinuation of operations at Dewas and Paonta Sahib. Also, consent decree related costs continue to impact profitability. We estimate reported PAT at INR344m compared to INR5.2b in the corresponding quarter last year. PAT adjusted for forex impact is likely to decline 73% YoY to INR361m due to subdued operational performance and higher tax rate. Operational pressure in the near term would be overcome by the monetization of key FTF opportunities. Moreover, SUNPs track record in turning around acquisition targets gives us the confidence that RBXYs core margins can expand to industry average of 18-20% over the next five years. The stock trades at 51.7x FY15E and 26.9x FY16E core EPS. We maintain Buy.
Key issues to watch for Timeline for resolving US FDA issues under the consent decree Improvement in core EBITDA margins Launch timeline for Divan and Valcyte
Bloomberg RBXY IN Equity Shares (m) 423.1 M. Cap. (INR b)/(USD b) 226 / 4 52-Week Range (INR) 538 / 254 1,6,12 Rel Perf. (%) 16 / -13 / 25
25.8 21.6 16.0 11.6 Div. Yield (%) 0.4 1.0 1.0 1.0 Reporting period changed to March ending; FY14E figures are 15 months; *Estimates include upside from FTF
CMP: INR3,270 Buy We expect revenue to grow 13% YoY in 2QCY14 to INR4.9b, led by the export formulations business. EBITDA is likely to grow 16% YoY to INR1b, with EBITDA margin expanding 50bp due to increasing contribution from exports and price increases in key products. We expect PAT to grow 28% YoY to INR655m. Growth is likely to be higher than EBITDA due to higher other income and lower taxes. We believe SANL is witnessing a phase of change in margin profile, led by (a) pricing benefit under new DPCO, and (b) discontinuation of some loss-making projects that had hurt margins in the past. We expect increasing momentum in earnings growth over the next few years. The stock trades at 26.2x CY14E and 21.4x CY15E EPS. Maintain Buy. Key issues to watch for Amortization of goodwill and brands acquired from Universal Medicare Impact of Drug Price Control Order (DPCO), 2013
Bloomberg SANL IN Equity Shares (m) 23.0 M. Cap. (INR b)/(USD b) 75 / 1 52-Week Range (INR) 3,540 / 2,280 1,6,12 Rel Perf. (%) -7 / -7 / -2
CMP: INR709 Buy We expect sales to grow 24% YoY to INR43.3b, driven by 28% growth in US revenues. Domestic formulations would grow 18% YoY, while RoW markets could grow 31%. Core sales are likely to grow 15% YoY to INR37.8b. EBITDA is likely to grow 25% YoY to INR19.1b. We expect EBITDA margin to remain flat YoY at 44% on a high base, aided primarily by Doxil and Cymbalta one-off sales. Core EBITDA margin is likely to decline 310bp YoY to 38.7%, with core EBITDA at INR14.6b. We estimate reported PAT at INR15.3b compared to net loss of INR12.8b last quarter. Adjusted PAT is likely to grow 8% YoY to INR12.2b, impacted by higher tax outgo. We believe that operational outperformance in the near term will be driven by recent price increases taken in certain products at Taro. Consolidation of RBXYs business and its subsequent turnaround would be growth drivers in the longer run. The stock trades at 26.6x FY15E and 22.7x FY16E core EPS. Buy. Key issues to watch for Outlook on competitive landscape for Taros products Sustainability of price increases at URL Pharma
Bloomberg SUNP IN Equity Shares (m) 2,071.2 M. Cap. (INR b)/(USD b) 1,468 / 25 52-Week Range (INR) 714 / 476 1,6,12 Rel Perf. (%) 14 / -2 / 4
CMP: INR696 Neutral We expect 32% YoY growth in 1QFY15 reported sales to INR12.8b over a high base, led by ~3x growth in US business due to one-off launches. Domestic formulations would grow 16% YoY, while export formulations are likely to grow 52% YoY. Core sales (excluding one-offs) are likely to grow 11% YoY. Reported EBITDA would grow 66% YoY to INR3.5b, with EBITDA margin expanding 560bp YoY, aided by one-off opportunities. Core EBITDA would remain flat at INR2b, with core EBITDA margin declining 240bp YoY. We expect reported PAT to grow 64% YoY to INR2.4b, in line with operational performance. Adjusted PAT would decline 16% YoY to INR1.2b, impacted by higher interest costs. We expect 17% CAGR in core earnings over FY14-16, slower than the 27% growth witnessed over the last two years. However, the stock trades at 19.1x FY15E and 16.2x FY16E EPS, which is at 18-20% premium over its last 5-year average valuations. Maintain Neutral. Key issues to watch for Sustained recovery in domestic formulations Performance of Brazilian operations amidst market pressures Outlook for US business
Bloomberg TRP IN Equity Shares (m) 169.2 M. Cap. (INR b)/(USD b) 118 / 2 52-Week Range (INR) 724 / 386 1,6,12 Rel Perf. (%) 8 / 24 / 32
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Disclosure of Interest Statement Companies where there is interest 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock GSK Pharma 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No
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