Investor's Eye
[August 21, 2013] | | |
| Summary of Contents
SHAREKHAN SPECIAL Q1FY2014 Pharma earnings review
Core operating performance slows in Q1 Key points -
Mixed performance for our universe: Amidst concerns of currency volatility, implementation of a new drug pricing policy in India and pricing pressure in some of the emerging markets, Sharekhan's pharmaceutical (pharma) universe reported a mixed performance during Q1FY2014. While the export-led revenues and operating performance were partially benefitted from a sharp depreciation in the Indian rupee against major international currencies, a sharp rise in other income, a lower effective tax rate and a year-on-year (Y-o-Y) lower mark-to-market (MTM) provision for foreign exchange (forex) loss boosted the bottom line for our pharma universe. However, the core operating performance was weaker for most of the players in Q1FY2014. Players like Glenmark Pharmaceuticals (Glenmark Pharma), Divi's Laboratories (Divi's Lab) and Cadila Healthcare (Cadila Health) especially disappointed us with an overall weaker performance during the quarter. -
Revenues and net profit grew by 20% YoY and 28% YoY respectively: On an aggregate basis, the pharma universe reported a 20% Y-o-Y rise in the net sales (as compared with our estimate of 23.3% during the quarter), mainly due to a weaker than expected performance in the contract research and manufacturing services (CRAMS) business and a slower performance of the select domestic players. The operating profit margin (OPM) of our pharma universe shrunk marginally by 43 basis points year on year (YoY) to 25.9% (vs our estimate of 24.4%) during the quarter despite currency benefits. The adjusted net profit of the universe witnessed a growth of 28.4% YoY (vs our estimate of 13.2%) on account of a sharp rise in other income and a lower effective tax rate . The growth in adjusted net profit was mainly led by Aurobindo Pharma (Aurobindo), Sun Pharmaceutical Industries (Sun Pharma) and Cipla. However, the reported profit declined sharply by 81% during the quarter mainly due to a MTM forex loss (Rs71 crore for the universe vs Rs274 crore in Q1FY2013) and non-recurring expenses of Rs2,517 crore related to settlement of Protonix patent litigation in case of Sun Pharma. -
US business continues to show strong growth; key players defy pricing policy concerns in domestic market: During the quarter, our pharma universe reported a 32% Y-o-Y rise in the US business, mainly driven by the business of Aurobindo (up 90% YoY) followed by Torrent Pharmaceuticals (Torrent Pharma; up 43% YoY) and Sun Pharma (up 32% YoY). However, a positive surprise came from the domestic formulation business, which grew by 17% YoY for our universe (vs our estimate of a 7% Y-o-Y growth). This level of growth in the domestic business was achieved amidst concerns related to implementation of the new pricing policy and despite the month-long strike in Maharashtra by various trade organisations. We believe the implications of the new pricing policy have not been fully reflected during the current quarter as many players got a stay order from the court to avoid immediate enforcement of revised prices on inventories already in the market. This also implies that the industry may face dull implication of the new pricing policy in the subsequent quarters. -
Long-term growth elements intact; we maintain positive view on the sector: For Q1FY2014, the performance of the pharma players in our universe has been a mixed one. While Cipla positively surprised us with an all-round better performance, players like Aurobindo and Sun Pharma also impressed with a stronger than anticipated performance. Though we believe that the volatility in the Indian currency and implementation of the new pricing policy would continue to negatively impact the performance of select players, the long-term growth story remains strong for players in our universe, given a strong product pipeline for the developed markets and focus on niche segments. -
Top picks: Sun Pharma (consolidation of the newly acquired entities and Taro Pharmaceutical [Taro] to drive growth), Cipla (focus on niche segments, consolidation of Cipla Medpro) and Aurobindo Pharma (aggressive product filings in the USA and Europe) are our top picks. Q1FY2014 Power earnings review
Margin expansion witnessed but environment remains challenging Key points -
Sales growth driven by PTC and PGCIL: During Q1FY2014 the sales of our power universe grew by 5% year on year (YoY) driven by PTC India (PTC) and Power Grid Corporation of India Ltd (PGCIL), which grew by 39% and 23% YoY respectively in the quarter. The universe's net sales for the quarter were in line with our expectation. CESC reported a flat revenue growth on a year-on-year (Y-o-Y) basis at Rs1,436 crore, which was 5% lower than our estimate. In case of PTC, a healthy growth in the volume and a better realisation resulted in a top line growth of 39% YoY and 26% quarter on quarter (QoQ) to Rs2,770 crore, which was 15% better than our estimate. -
Margin expansion, a positive surprise: During Q1FY2014, the universe reported a 17% Y-o-Y growth at the operating profit level. All the companies in our universe expect PTC reported a healthy double-digit growth ranging from 11% to 24% in Q1FY2014. In case of PTC, due to a change in its business model from a tolling arrangement (where the company used to earn 50-70 paise per unit of operating profit, depending upon the landed cost of imported coal) to a long-term arrangement (where the company usually earns around 5-6 paise per unit of operating profit), the overall operating profit was hit in Q1FY2014. The operating profit margin (OPM) of PTC stood at 1.2%, down 37 basis points YoY and 110 basis point QoQ in the quarter. CESC reported a healthy margin of 22.6%, 197 basis points higher YoY. -
Earnings grew moderately at 5-7% YoY: The profit after tax (PAT) performance of the universe remained broadly in line except in case of PTC (whose PAT was affected by the change in its business model). The PAT of our coverage companies grew by 6.7% while the PAT of the total universe showed a growth of 5.7% in the quarter. Among the non-coverage companies, NTPC showed a flattish growth of 1.1% YoY while PGCIL grew by 19% YoY during Q1FY2014. -
Outlook-recovery measures initiated but a long way to go: We believe the government's efforts to provide relief to the sector continues in the form of fast-track clearances of the pending projects, ensuring better coal supply and providing relief to the state electricity boards (SEBs). However, these efforts would take time to reflect in the earnings performance of the power companies. On the other hand, power companies having stressed assets with high leverage may continue to face challenges as the overall economic condition continues to deteriorate. In such an environment, the industry may witness some merger & acquisition (M&A) activity, as some of the companies having a comfortable balance sheet are eyeing distressed assets. As the structural issues pertaining to the sector get addressed one after another, companies having a prudent business model and earnings visibility would eventually emerge as winner. The market has clearly differentiated the performers from the non-performers within the sector and the gap between the valuations of the former and the latter is likely to widen in the coming days. Hence, we advise investors to remain selective in the sector.
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Regards,
The Sharekhan Research Team | |
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