Investor's Eye: Update - Pharmaceuticals (Latest wave of price control to bruise margins; but that is manageable!)

 

Investor's Eye [July 14, 2014]  Sharekhan www.sharekhan.com

Summary of Contents   SECTOR UPDATE   Pharmaceuticals   Latest wave of price control to bruise margins; but that is manageable!   Key points Price control extended beyond essential medicines: In a surprise move, the National Pharmaceutical Pricing Authority (NPPA) has brought under price control 108 new formulations which are not on the National List of Essential Medicines (NLEM). Most of the drugs brought under price control belong to the cardiovascular and anti-diabetic segments, which have been growing rapidly and generating healthy margins for the domestic players. The prices of these drugs would be cut by 15% to 50% depending on the prevailing market price and competition.  Domestic industry to see 1-3% impact on EBIDTA as a result: Our rough estimate suggests that the front-line domestic players may see 1.0% to 2.5% erosion of their operating profit margin (assuming an average reduction of 20% to 30% in the prices of the new drugs brought under price control). Among our coverage universe, we find that the impact of the move will be stronger on Ipca Laboratories, Torrent Pharmaceuticals, Cadila Healthcare and Lupin. Besides, the multinational companies like Sanofi India (a leader in the anti-diabetic segment) and Pfizer India would also feel the negative impact of the new pricing policy.  Strong growth in top line to make up for the loss; we maintain positive stance on the sector: Though the latest wave of price control is set to hurt the operating profit margin of the domestic players, but we believe a strong growth in exports (exports contribute close to 60% of the revenues of our universe) and expansion in the domestic market (leading to a volume growth) will make up for the loss. Therefore, we remain positive on the pharmaceutical sector and maintain our Buy rating on all the stocks under our coverage. However, players like Aurobindo Pharma, Divi's Laborateries, Cadila Healthcare and Torrent Pharmaceuticals are our preferred picks in the sector.  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

 

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