Pharma cos likely to emerge stronger in Q2The pharma sector is poised to emerge as one of the best-performing sectors in terms of its performance for the September quarter.

With no new surprises on the forex side, lower raw material costs and the slow recovery in the US economy, the sector is likely to register strong earning growth.

Average estimates of the seven leading pharma companies by ETIG and eight other broking houses indicate a strong double-digit growth of 77% in aggregate net profits during the quarter ended September 2009, against the corresponding quarter last year. The earnings figures have been further boosted by expectations of a profitable show from Ranbaxy, which had reported a loss of Rs 394.5 crore in the same quarter last year.

However, the aggregate net sales are expected to be poor at 3% Y-o-Y. The stunted net sales growth is due to Sun Pharma and Ranbaxy which are expected to report a drop in sales. With the growth in earnings not being impacted, net profit margin is estimated to increase by 580 bps to 14% for the second quarter of the fiscal.

The swine flu, along with the monsoon season, is expected to lead to healthy growth in the domestic formulations business for most companies. DRL and Sun Pharma are expected to register a pick-up in their domestic formulations business. The rupee has largely remained range-bound last quarter, which should be beneficial to many pharma firms. With economic conditions improving in the US, most companies are likely to witness good growth in their US business.
Companies such as Cipla and DRL may emerge as outperformers, while Ranbaxy may show signs of revival.

Ranbaxy is expecting to receive US FDA clearance for its Dewas plant. Most firms, except Sun Pharma, are expected to report a rise in their earnings and revenues. Sun Pharma’s earnings would suffer a Y-o-Y drop of 38.5% in net profit and 21% in revenues on account of a high base-year effect and a possible inventory write-off following the US FDA seizure in the preceding June quarter.

Mid-cap pharma firms such as Lupin, Cadila Healthcare and Ipca are also likely to report a good performance for the quarter. A good show in emerging markets as well as the US would be a key growth driver. Recovery in the CRAMS business will lead to positive performance for Piramal Healthcare, Jubilant and Divi’s Labs.

Going forward, the next few months are likely to determine the ability of Indian companies to meet the US FDA norms. Currency stability will also be a key factor for companies with forex liabilities. Firms with diversified derisked business models would prove to be a much better option for the investors in this scenario.