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Fighting Fit

Robust sales in the US along with recovery in the domestic market drives earnings for the pharma sector


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Pharma companies in general saw a mixed bag of performance. Some companies reported robust growth in revenues on the back of strong show in US and domestic sales while others saw sluggish sales because of slowdowns either in some verticals, geographies or delayed approvals.

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The US is the biggest market for Indian pharma companies. Most of the listed players derive a significant portion of their revenues from the US. The US which is the largest pharma market in the world has had an important role in shaping many of our domestic pharma companies into pharma MNC's. In the latest quarter too, several companies like Aurobindo, Lupin, Cadila and Torrent reported strong US sales.

The Indian pharma market is still recovering from the impact of the National Pharma Pricing Policy (NPPP) that is aimed at regulating the selling prices of many drugs. After bearing the impact of the NPPP through most of the current year and other channel issues, the domestic pharma sector saw robust revenue growth of close to 12 per cent in October on the back of new product launches outside the purview of the NPPP, higher volumes and price hikes. Even those drugs falling under the price control saw price increases. With the worst behind it, the domestic pharma sector is expected to maintain its momentum well into the coming year.

Outlook
The BSE Healthcare Index has had a fantastic year in 2014 with gains of 44 per cent (year-to-date) compared to the Sensex's 30 per cent gain. Most of the Index's outperformance came in the second half following a better outlook, higher margins and improved growth in domestic market. Surprisingly, the run-up in prices does not appear to have run ahead of valuations. The healthcare index today at 27x trades below the 45x premium it was commanding between February 2012 to August 2013. Given that pharma's momentum continues to remain strong, buy selectively only during market or stock declines.

Star performer of the sector
Sun Pharmaceuticals
Sun Pharma has been a market favourite for some time now. Sun has many things that its peers can only dream of: an ANDA pipeline that handily beats that of any other domestic pharma company, margins that most of its competitors cannot match are higher than most of the industry and a successfully operating US subsidiary in Taro. To top it all, the benefits of the Ranbaxy acquisition have hardly started showing. Once that consolidation happens in a year or two, Sun is likely to move up further ahead.

Robust US sales and good show in India makes pharma the market's favourite

Company NameSales Growth YOY PAT Growth YoYTTM EPS (G) YoYTTM Ebitda margin (%)D/EROCE
(%)
Sun Pharma0.25081.70991.709947.94 (46.16)0.1425.47
Lupin0.23670.46490.461829.82 (26.66)0.0940.97
Dr. Reddys Labs0.1380.11810.116420.19 (19.48)0.5824.77
Cipla0.1655-0.1848-0.184820.49 (26.91)0.1219.05
Aurobindo Pharma0.52172.78682.782926.61 (14.16)1.0127.18

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