Q3FY2007 pharma earnings preview
Key points
- We are positive on the Indian pharmaceutical sector and expect most companies to report good earnings growth for Q3FY2007, driven by continued domestic growth, steady contributions from exports and synergies arising out of integration of acquisitions. We expect the pharmaceutical companies under our coverage to report a revenue growth of 22.7% for Q3FY2007.
- Despite the de-stocking impact caused by the anticipatory introduction of value-added tax (VAT) in Tamil Nadu with effect from January 1, 2007, the branded formulation business in the domestic market continued its growth momentum in the quarter. The growth momentum was maintained on the back of aggressive new product launches and continued focus of companies on the high-growth chronic lifestyle segments. The companies with a wider domestic presence like Cipla, Sun Pharmaceuticals, Nicholas Piramal and Cadila Healthcare are the likely beneficiaries.
- On the export front, the growth is expected to be strong, on the back of new product launches, especially of products under 180-day exclusivity. For example, Ranbaxy Laboratories is expected to derive strong sales from "Zocor" under 180-day exclusivity while Dr Reddy's Laboratories may witness revenue upsides from the sale of "Zocor" and "Proscar" under authorised generic terms with Merck Inc. Similarly, Cipla is expected to strengthen its exports by supplying active pharmaceutical ingredients (APIs) of "Zoloft" and "Proscar" to Teva.
- With a greater number of players entering the generic space in the USA, pricing pressures are likely to continue. The pricing environment in the key markets of Europe too is likely to be tough with the ongoing regulatory reforms.
- The merger and acquisition (M&A) focus of Indian pharmaceutical companies has continued in the quarter, with Ranbaxy Laboratories acquiring South African Be Tabs and Wockhardt acquiring the Irish generic company, Pinewood. The integration of past acquisitions is likely to get reflected in the earnings growth of the pharmaceutical companies during the quarter. Moreover, we expect the Indian pharmaceutical companies to continue to widen their geographical presence and expand product portfolios through inorganic means.
- On the domestic front, the contentious issues of pricing control, data exclusivity etc continue to loom over the domestic pharmaceutical industry. Despite this, the increasing focus on the high-margin regulated markets coupled with an improvement in the product mix (moving more towards the high-margin formulation business), improved cost discipline and shifting of production to tax-free zones is likely to get reflected in the improving operating profit margin (OPM) of the Indian pharmaceutical companies. We expect the OPM of the pharmaceutical companies under our coverage to expand by 540 basis points in Q3FY2007.
- The recent outlicencing deal of Glenmark Pharmaceutical's anti-diabetic molecule to Merck KG has reinforced confidence in India's innovative and research abilities. India's capabilities in drug discovery research are being increasingly recognised by global pharmaceutical majors. Lupin's anti-migraine compound entering Phase III clinical trials further vindicates the capabilities of the Indian companies to create their own innovative new chemical entity (NCE) pipeline. We expect further positive newsflow on the innovative research and development (R&D) front from Sun Pharmaceuticals, Lupin, Dr Reddy's Laboratories and Glenmark Pharma in the coming quarters.
- The strong cost control initiatives coupled with the synergies derived out of the integration of acquisitions are expected to drive the earnings growth of the Indian pharmaceutical companies. The pharmaceutical companies under our coverage are expected to report a jump of 58.9% in their net profit in Q3FY2007.
Q3FY2007 banking earnings preview
We expect the interest on advances to show a strong growth on the back of ~30% year-on-year (y-o-y) credit growth and the full impact of the hike in the prime lending rates (PLRs) effected by banks in August 2006. However, the cost of funds may have an upward bias as the deposit costs, especially the bulk deposit rates, have moved up sharply and many banks have also made significant borrowings to shore up their capital requirements in Q3FY2007. Hence we expect some pressure on the margins of the banks on a quarter-on-quarter (q-o-q) basis. The other income growth too is expected to be strong for the third quarter, with the fee income also expected to show a good growth. The trading income component could be a surprise though. For the banking stocks under our coverage (without adjusting for State Bank of India [SBI]), we expect a 12.9% increase in the net interest income (NII), an 18.5% rise in the operating profits and a 17.2% growth in the profit after tax (PAT) on a y-o-y basis. For all banks excluding SBI, we expect the NII, operating income and PAT to grow by 22.6%, 26.8% and 21.2% respectively on a y-o-y basis. Among the public sector banks (PSBs), Bank of India (BOI), SBI (adjusted numbers), Punjab National Bank (PNB) and Bank of Baroda (BOB) are expected to report a strong profit growth. On the other hand, the private banks (PVBs) are expected to report a y-o-y profit growth in the range of 26-32%.
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