Indian Pharma in Fourth Quarter 2009 forecast by Sharekhan

Q4 Indian pharma sector earnings to shrink; but many firms could spring surprise: Sharekhan.

The pharmaceutical companies in India are expected to report a slower growth in the fourth quarter of the financial year 2009 compared to previous quarters. The Indian domestic market growth will be moderated to ~10.8% in Q4FY2009 as compared with ~12-14% in the preceding quarters, according to Sharekhan, a stock brokering firm based in Mumbai.

India’s pharmaceutical companies are expected to post only an average 4.2% increase in their revenues for Q4FY2009.

General slowdown in the domestic market and the high-base of Q4 FY 2008 for companies such as Sun Pharmaceutical Industries (Sun Pharma) and Glenmark Pharmaceuticals (Glenmark). The Q4FY2008 revenues of these two companies were boosted by exclusivities and milestones respectively.

Q4 2009 Pharma sector forecast

The pharmaceutical companies in India are expected to report a slower growth in the fourth quarter of the financial year 2009 compared to previous quarters. 

Adjusting for this non-recurring stream of revenues, the top line these companies is expected to grow by a healthy 17%, aided by a weaker rupee.

The operating profit margin (OPM) of the companies under coverage is expected to shrink by 920 basis points, largely driven by a reduction in the margin of Sun Pharma (the Q4FY2008 margin was at an all-time high due to Oxcarbazepine, Pantoprazole and Ethyol exclusivities), Glenmark (which had recorded a very high margin in Q4FY2008 due to the receipt of a milestone income and Oxcarbazepine exclusivity) and Piramal Healthcare (which had written-back Rs40 crore in the new chemical entity [NCE]-related research & development [R&D] expenses subsequent to its de-merger).

The rising staff costs and foreign exchange (forex) losses on trade receivables would cause margin pressure on Cadila Healthcare and Torrent Pharmaceuticals. On the other hand, companies like Orchid Chemicals & Pharmaceuticals (Orchid) and Ipca Laboratories (Ipca) are expected to witness a healthy margin expansion due to a low base in Q4FY2008.

With a modest revenue growth and poor operating performance, the reported net profit of the Indian pharmaceutical companies under coverage would decline by 52.7%. This would be on account of the marked-to-market (MTM) losses (on account of ~4.5% depreciation in the Indian Rupee against the US Dollar) recorded by companies like, Orchid, Piramal Healthcare, Cadila and Ipca, which have outstanding forex liabilities.

The higher interest and depreciation costs due to acquisitions and/or expansion in capacities would also affect the reported profits in the case of Cadila, Orchid, Ipca and Opto Circuits India (Opto).

One-time incomes recorded in Q4FY2008 in the case of Sun Pharma and Glenmark would also limit the net profit growth of these companies. On excluding the non-recurring income/expenses and the forex impact, Sharekhan believe the adjusted net profit of the companies would decline by ~37.5%.

The estimates include forex translation losses on export receivables and MTM losses on foreign currency hedges and liabilities.

Based on the individual company’s decision on the deferment of AS 11 norms under which companies have to expense their MTM losses on foreign

currency hedges and liabilities. The estimates can vary to the extent of such losses.

Lupin, Sun Pharma and Opto, which are expected to deliver a strong top line and bottom line growth. On the other hand, companies like Ipca and Orchid could surprise negatively due to higher than anticipated forex losses.