[Investors Please Listen] Q4FY2009 Pharma earnings preview: Sharekhan Special dated April 08, 2009

Key points The pharmaceutical companies under our coverage are expected to report a 4.2% increase in their revenues for Q4FY2009. The expected growth of the pharmaceutical companies is lower than that seen in the previous quarters due to a general slowdown in the domestic market (the domestic market growth moderated to ~10.8% in Q4FY2009 as compared with ~12-14% in the preceding quarters) and the high-base of Q4FY2008 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. Adjusting for this non-recurring stream of revenues, the top line of the Sharekhan universe of companies is expected to grow by a healthy 17%, aided by a weaker rupee.  The operating profit margin (OPM) of the companies under our 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, we expect companies like Orchid Chemicals & Pharmaceuticals (Orchid) and Ipca Laboratories (Ipca) 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 companies under our 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, we believe the adjusted net profit of the companies under our coverage would decline by ~37.5%.  Our 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), our estimates may vary to the extent of such losses. Our top picks include 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.

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Click here to read report: Sharekhan Special

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