Pharma sector’s Q1FY18 revenue is expected to remain flat y-o-y on last year’s high base consisting gGleevec and gGlumetza in US. However, EBITDA and PAT are expected to decline 16% and 26%, respectively, as sharp rupee appreciation (~Rs 2.4 y-o-y) will hurt core earnings to the tune of ~7%. Adjusted for these 2 factors, we estimate earnings would have still declined ~10%. While US revenue is likely to tumble 9% y-o-y, it will grow 5% q-o-q in constant currency post the slump in Q4FY17. The latest wave of consolidation (WBAD-Econdisc alliance) poses risk to this. India sales will face the brunt of GST headwind and we expect our coverage’s growth to be curtailed at 6% y-o-y. Overall, while NATP (gTamiflu) and GNP (gZetia) are anticipated to post best growth, SUNP (gGleevec) and LPC (gGlumetza) will clock worst declines.
Even in the healthcare space, while APHS’s Navi Mumbai ramp up losses will weigh on EBITDA growth (down 6% y-o-y), DLPL’s EBITDA will grow merely 4% y-o-y. The sector is grappling with structural business challenges (further customer consolidation, rising competition) in the US and has de-rated since FY16 highs – 16% premium to Nifty at Q1FY18 end versus high of ~70% in September 2015.
Street’s downgrades continued with 17%/13% cut in FY18/19 earnings through Q4FY17 earnings during Q1FY18. However, during the quarter, on an average, dollar and euro depreciated ~4% and 6% y-o-y, respectively, versus rupee, which implies ~15% impact on the sector’s profit.
Moreover, GST’s roll out in July has impacted growth in India, which will show up in Q1FY18 earnings. In the healthcare space, we expect negligible impact of demonetisation and price regulation for stents. SUNP: gGleevec in base; LPC: gGlumetza in base; Cipla: Steady growth, last year had low tax rate; CDH: Asacol HD AG and Lialda fill some void left by HCQS benefit; DRRD: Rebound on last year’s low base (12% margin), sluggish performance otherwise; ARBP: US business challenges to result in top line and margin headwinds; TRP: High erosion in US to hurt earnings; GNP: gZetia to benefit; Divi’s: Import alert headwinds; NATP:
Last bit of gTamiflu benefit, no benefit from gDoxil; Ipca: Growth to largely mirror India market; APHS: EBITDA margin to remain under pressure due to commissioning of hospital at Navi Mumbai; Fortis: Impact of FHTL transaction; Max: Top line to grow 5% y-o-y; HCG: Top line to grow 15%; DLPL, THC: Top lines to grow 12%, 20%, respectively; however, DLPL’s margin to be weaker due to the newly commissioned lab.