Wednesday, July 10, 2013

Investor's Eye: Special - Q1FY2014 Pharma earnings preview, Q1FY2014 Construction earnings preview, Q1FY2014 earnings preview

 
Investor's Eye
[July 10, 2013]
Summary of Contents
 

 

SHAREKHAN SPECIAL

Q1FY2014 Pharma earnings preview 
US and European markets to drive the growth

Key points 

  • Exports to drive growth: We expect our pharmaceutical (pharma) universe to report a 23.3% year-on-year (Y-o-Y) growth in revenues for Q1FY2014. The growth would be mainly led by formulation exports to the US and European markets. However, the Indian formulation business is likely to see a slower growth due to uncertainties that prevailed over the new pricing policy during the quarter. The revenue growth during the quarter was mainly led by Aurobindo Pharma (Aurobindo) and Glenmark Pharmaceuticals (Glenmark), which are expected to have seen an impressive growth in the US and European markets. However, players like Cadila Healthcare (Cadila) and Cipla would see a moderate growth due to weaker sales in their Indian formulation business and a limited number of new product launches during the quarter. We expect players engaged in contract research and manufacturing services (CRAMS) activities to post a better performance partly on currency benefits and the normalisation of business in case of Divi's Laboratories (Divi's Labs) and on better offtake in case of Torrent Pharmaceuticals (Torrent) and Dishman Pharmaceuticals and Chemicals (Dishman). Our pharma universe is likely to show an 18.8% growth year on year (YoY) in the CRAMS segment for the quarter.

  • Weaker domestic revenues and absence of exclusivities affect OPM: We expect the operating profit margin (OPM) of most players to decline mainly due to lower revenues from their branded formulation business in India and the high base effect caused by limited period supplies of products under exclusivities. Except Aurobindo (a fast ramp-up in US supplies) and Lupin (key product launches in the USA), none of the other players are likely to see margin expansion YoY. Cipla would see the sharpest decline in the OPM due to the genericisation of Lexapro (supplied to Teva Pharmaceutical Industries [Teva]) and weaker sales in the Indian market while players like Sun Pharmaceutical and Industries (Sun) would see a fall in the OPM due to competition in key products like Lipodox and the pricing pressure faced by the key products of Taro. The OPM of our pharma universe is likely to decline by 315 basis points YoY to 24.4%.

  • Higher effective tax rate to restrict our universe's profit growth to 13%: The effective tax rate for the pharma universe stood at 22.8% during the quarter as compared with 21.5% in Q1FY2013. This affected the adjusted net profit, whose growth was restricted to 13% YoY during the quarter. The earnings growth would be mainly led by Aurobindo (97.7% YoY) followed by Lupin (48% YoY) and Glenmark (27.6% YoY). Cipla would see an 18.5% year-on-year (Y-o-Y) decline in the adjusted net profit on loss of revenues from the supplies of Lexapro generic to Teva. 

  • Sector valuation and view: We expect the pharma companies in our coverage to continue to maintain a strong growth in the subsequent quarters, despite head winds in the domestic market and higher research and development (R&D) expenses by players to keep up with international quality norms. The growth would be mainly driven by the growth in the base business of the key players, currency benefits and the key launches in the US and European markets. We expect our pharma universe to record revenue and net profit compounded annual growth rate (CAGR) of 17.5% and 19.3% respectively over FY2014-15. 
    On an average, our pharma universe is trading at 21.7x and 17.5x earnings for FY2014E and FY2014E which is in line with the BSE Healthcare Index, which is trading at 20.9x and 17.6x FY2014E and FY2015E earnings. 

  • Top picks: We are especially positive about Aurobindo (it has witnessed a ramp-up in US supplies), Lupin (a ramp-up in oral contraceptive portfolio, launch of low-competition products and potential inorganic expansions) and Sun (consolidation of newly acquired entities and limited downside post-resolution of the Protonix case). We also see a potential upside from the US business of Cadila, which is awaiting new product approvals filed from its Moriya plants, which were recently cleared by the US Food and Drug Administration (USFDA).

 

Q1FY2014 Construction earnings preview 
Situation likely to improve marginally but problems far from over

Key points

  • Lower execution to affect revenue growth, weakness at PAT level to persist: The first quarter of FY2014 will continue to witness poor results as the engineering, procurement and construction (EPC) companies have had to prolong their battle against mounting interest burdens. We expect the aggregate revenues of the Sharekhan EPC universe to grow marginally by 1.4% year on year (YoY) led by lower execution across projects. However, the earnings are estimated to decline by 17.3% on account of lower revenues and continuing interest burden.

  • Asset developers to witness a mixed growth in earnings: Asset developers that have otherwise outperformed the EPC players would feel the pinch too due to a rising interest burden. IL&FS Transportation Networks Ltd (ITNL) is expected to post a growth of 2.1% YoY in its revenues on account of a lower fee income. We expect the margins to decline by 6 basis points leading to an EBITDA growth of 1.9% YoY. But higher depreciation and a rising interest burden would dent the earnings, which would decline by about 1.9% YoY. IRB Infrastructure Developers (IRB) is expected to post a nearly 24.7% growth YoY in its earnings due to an 18.5% growth in its top line led by strong order execution and the start of construction activity at its mega highway project, viz the Ahmedabad-Vadodara project.

  • Small EPC companies to follow suit in terms of earnings growth: In our universe, we expect the smaller EPC players like Pratibha Industries (Pratibha) and Unity Infra (Unity) to post a better growth in the earnings led by higher execution. This expectation is supported by higher execution of a strong order book, which comprises smaller orders that normally do not get stuck for long for want of clearances or approvals.

  • Outlook-situation likely to improve from FY2014: The construction companies are already witnessing an improvement in execution of projects. Going ahead, the policy action prompted by the direct intervention by the Prime Minister's Office (PMO) is expected to improve the situation further. Moreover, we expect the margin and the interest burden to also ease out on the back of the expected monetary easing by the Reserve Bank of India (RBI). However, the divergence in the performances of the construction companies would remain wide and it would be better to remain selective. We prefer companies that have relatively better order inflows and execution track record in the existing tough conditions. Hence, we maintain our positive bias on IRB and Pratibha.

 

Q1FY2014 earnings preview 
Earnings growth could turn negative this quarter

Key points

  • Revenue growth falters to low single digits: For Q1FY2014 the Sensex companies on an aggregate basis are expected to show a revenue growth of 3% year on year (YoY; a growth of 4.5% YoY ex metal companies). The breadth of the revenue growth is worrying as about one-third of the companies in the Sensex are expected to post either a decline or a growth in low single digits YoY in the revenues. From a sectoral perspective, sectors like pharmaceuticals (pharma), information technology (IT), fast moving consumer goods (FMCG) and private banks are expected to post a double-digit growth in the revenues. However, Reliance Industries Ltd (RIL) and the metal sector are expected to post a decline in the revenues. 

  • Margins expected to decline sequentially: Though corporates had witnessed some recovery in their earnings before interest, tax, depreciation and amortisation (EBITDA) margin in the past couple of quarters led by a drop in their input cost, but the trend is likely to reverse in Q1FY2014 due to a rise in the cost of inputs (partly contributed by the rupee's depreciation). On an aggregate basis, we expect the EBITDA margin of the Sensex companies to decline by about 50 basis points quarter on quarter (QoQ) to 18.5%. The margin pressure is likely to be higher for sectors like metals, capital goods and power. Some of the sectors like IT and FMCG could see some margin expansion QoQ.

  • Earnings growth flat without taking MTM forex related provisions into account: The aggregate profit after tax (PAT) of the Sensex companies is expected to grow marginally by 0.5% YoY without considering the marked-to-market (MTM) provisions for the outstanding liabilities (debt in foreign currencies) on the books for many companies, like Bharti Airtel, and Larsen and Toubro (L&T; some of the companies would adjust it directly in the balance sheet with little impact on their Profit and Loss Account). As seen in the previous quarters, the breadth remains poor as about 14 companies in the 30-company index (Sensex) are expected to report a decline in their earnings as compared with Q1 of FY2013. 

  • Consensus earnings estimate already downgraded, more cuts possible: Against the expectation of a 14-15% earnings growth for FY2014 at the beginning of the fiscal, the consensus growth estimate has been revised downwards to 10% now. The risk of further downgrade in the consensus estimate remains high due to the weakening of the domestic demand momentum, delay in the easing of interest rates, the rupee's depreciation and an uncertain global environment. On the positive side, we expect the earnings growth to pick up in H2 of the current fiscal on the back of a cyclical pick-up in the economy and a lower base effect. However, the global factors are likely to play a significant role in shaping the earnings outlook.

 


Click here to read report: Investor's Eye

 

 

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

 

 


       

       

Regards,
The Sharekhan Research Team
myaccount@sharekhan.com

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