India sales boosts pharma earnings in Q3; US markets remains a key concern: CLSA

Sustained cost controls offset weaker gross margins in some cases as Ebitda was in line with CLSA’s estimate, up 25 percent YoY to Rs 97.9 billion.

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"Margin expansion surprised positively in 3Q with 60 percent of our coverage showing better-than-expected Ebitda margins. Overall, margin expanded 3.1 ppt YoY to 23.2 percent; ex-Lupin, margins increased 2.5 ppt YoY to 23.6 percent, 2.1 ppts better than our forecast,” CLSA said in a report.

Adjusted profits rose in the double digits YoY for a fourth quarter, spiking 45 percent YoY to Rs 61.6 billion, an 11 percent beat.

Big misses on adjusted profits for Biocon (a 20 percent miss; weaker-than-expected biologicstraction), Dr Reddy’s (a 22 percent miss; weak US sales and higher opex/tax) and Glenmark (11 percent below; an all-around miss) hindered profit growth.

Sun Pharmaceutical Industries and Cipla had standout quarters, helped by increased speciality sales and strong performance in India/EMs, respectively. Dr Reddy’s reported profits declined due to a large impairment, CLSA said.

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India formulations sales were 3 percent ahead of CLSA’s estimates, up 13.0 percent YoY to Rs 122 billion in the quarter ended December 2020 despite a high base. Two-thirds of growth was driven by Cipla, Dr Reddy’s and Sun Pharma.

India sales growth for Lupin at 5 percent, Ipca Labs at 8 percent and Abbott India at 2 percent were below CLSA’s estimates.

Meanwhile, US revenue during the quarter up 1 percent YoY/QoQ to USD 1.74 billion was weak as all companies but Sun Pharma and Aurobindo Pharma missed CLSA’s estimates.

"Sun Pharma’s recovery (up 11 percent QoQ) was led by a speciality sales rebound but a weak flu season hurt Lupin (up just 4 percent QoQ) while inventory corrections/no one-time opportunities hindered Cadila (down 6 percent QoQ). Growth was weak for Dr Reddy’s and Torrent due to high price erosion,” CLSA said.

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Meanwhile, Apollo Hospitals’ Q3FY21 consolidated net profit was 30 percent ahead of the brokerage’s estimate with hospital occupancy lower than expected but margins surprised positively. For Dr Lal Pathlabs, net profit was a 45 percent beat due to higher realisations even as volume growth was in line.

CLSA recently downgraded Apollo to Sell on punchy valuations and as earnings have limited potential to surprise. Dr Lal Pathlabs was recently downgraded to Underperform as organic expansion plans in west/south India should weigh on medium-term margins, the brokerage house noted.

Consensus index FY21-23 earnings were upgraded for a second successive quarter with 1-4 percent revisions after 3Q results; upgrades in the past six months are now at 2-9 percent. Most of this earnings increase was led by Sun Pharma, Aurobindo, Cadila and Cipla.

“Our coverage universe should show a 9 percent revenue CAGR during FY20-22CL with adjusted profits rising at a faster 19 percent CAGR, led by a 3.3ppts expansion in Ebitda margins to 23.3 percent," CLSA said.

NSE’s Pharma Index PE is more than one standard deviation above its long-term average but improved earnings and a 6.9 ppt ROCE rise to 19 percent in FY23 should sustain multiples, it added.

CLSA remains positive on Sun Pharma (ramp-up of specialty portfolio), Cadila (push towards innovation) and Cipla (respiratory portfolio monetisation) but negative on Biocon (market share challenges for biosimilars) and Lupin (an uncertain earnings outlook).