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Business News » India News

Q2 earnings: Despite rupee boost, Pharma companies set to suffer; here is why

Despite a fall in the rupee, earnings of the export-led pharmaceutical sector are expected to remain muted in the July-September quarter, mainly due to the high base a year ago that resulted from the restocking after the implementation of goods and services tax.

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Q2 earnings: Despite rupee boost, Pharma companies set to suffer; here is why
Continued pricing pressure in the US and increased raw material cost due to supply disruption from China will also impact the second quarter (Q2) earnings. Image Source: Reuters
Written By: ZeeBiz WebTeam
Updated: Fri, Oct 12, 2018
11:02 am
Mumbai, ZeeBiz WebDesk
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Despite a fall in the rupee, earnings of the export-led pharmaceutical sector are expected to remain muted in the July-September quarter, mainly due to the high base a year ago that resulted from the restocking after the implementation of goods and services tax.

Continued pricing pressure in the US and increased raw material cost due to supply disruption from China will also impact the second quarter (Q2) earnings.

In a sector earnings preview, HDFC Securities said the year-on-year growth for its coverage universe would remain subdued at 6.7% and the margin is likely to decline on a high base seen in Q2 of last the financial year as affected by (GST) restocking.

However, with a steep fall in rupee and stabilising US base business, the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin is likely to increase 130 basis points over the previous quarter. “This will be the fifth straight quarter with a positive sequential topline (revenue) growth for our coverage companies,” the HDFC Securities report said.

One basis point is one-hundredth of a percent. With the US regulatory issues getting resolved, consolidation at manufacturer-level continues in the US. And with the withdrawal of non-profitable products by key US generic companies, the brokerage firm expects that Indian companies should start reporting substantial improvement in their operational performance from the third quarter. It also expects pharma stocks to outperform in the second half of the fiscal.

The report further said except Dr Reddy’s Laboratories, which will witness price erosion in the US base business, improved performance is anticipated by large generic companies in the July-September quarter. Sun Pharma, Cipla, Cadila Healthcare and Aurobindo Pharma are expected to see their revenues growing; profitability will go up sequentially.

Sharekhan in its earnings preview said the sector is expected to report a weak operating performance in the second quarter due continued pricing pressure in the US coupled with a high base of US generics business, muted domestic business growth on account of high base led by GST-led channel refilling and increased cost due to supply disruption from China.

It expects the pharma companies under its coverage universe to report sales growth of 8.3%, led by favourable rupee movement.

Operating profit, however, is expected to decline 0.5% basis points to 22% and profit is expected to decline 4.6%.

The Sharekhan report said even after the rally of the past few months, valuation multiples of some pharma companies under its coverage universe are still trading close to long-term average multiples due to de-rating of the past two years.

Also, raw material inflation will offset some of the gains aided by US dollar appreciation, brokerage firm Nirmal Bang said in its report. The domestic market is doing well for most players, but on-year earnings growth may not reflect the same due to high base of the previous year following GST rollout.

The brokerage expects a subdued performance with topline growth of 6.1% on-year, 6.7% rise in Ebitda and 11.6% growth in profit after tax. Currency depreciation may also help in easing the pressure on margins, it added.

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Nirmal Bang also said the price erosion pressure in the US is likely to be less relevant during the quarter. Most players have shed a majority of low-competition assets and the pipeline replacement power can more than offset the base business erosion. The oral solid space is being gradually vacated by large players which should allow moderation in base business erosion pressure, the report added.

Source: DNA Money Correspondent

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TAGS:
Indian RupeeHDFC SecuritiesGoods and Services tax
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Rupee falls 24 paise to 73.48 against US dollar in early trade Rupee falls 24 paise to 73.48 against US dollar in early trade
CURRENCY IN CIRCULATION - Rise by Rs 3.23 lakh cr in first nine months of FY21; Know what people preferred in Covid times CURRENCY IN CIRCULATION - Rise by Rs 3.23 lakh cr in first nine months of FY21; Know what people preferred in Covid times
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