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Q3 FY21 Pharma Sector Preview
Q3FY21 Preview 16h January 2021 th India Equity Institutional Research II Q3FY21 Earning Preview II 16 January, 2021 Page 2
Pharmaceuticals Domestic markets to boost Pharma sector growth MARKET DATA Close 1D (%) 1M (%) YTD (%) 1Y (%) Nifty 14,434 (1.1) 6.4 3.2 16.9 Sensex 49,035 (1.1) 6.0 2.7 17.1 Nifty Pharma 13,014 (1.6) 4.7 0.8 59.4 BSE Healthcare 22,035 (1.2) 4.2 1.6 59.8 COVERAGE STOCKS Market Cap. Fwd PE Current Price Target Price Company Upside Recommendation* (INR) (INR)* (INR mn) 2022E (x) Sun Pharma** 604 598 -1.0% 14,49,522 25.3 ACCUMULATE Lupin** 1093 994 -9.1% 4,94,806 26.9 ACCUMULATE Cipla 824 950 15.3% 6,64,358 21.7 BUY Dr. Reddy’s 5213 5,418 3.9% 8,65,632 26.5 ACCUMULATE Cadila Healthcare** 488 483 -1.0% 5,00,098 21.1 HOLD Torrent Pharma 2712 UR UR 4,57,745 39.0 UR Aurobindo Pharma 936 1,044 11.5% 5,46,974 14.1 BUY Glenmark Pharma 512 616 20.3% 1,44,470 12.9 BUY Alembic Pharma 1088 1,286 18.2% 2,14,254 19.9 BUY Granules India 356 459 28.9% 88,284 14.7 BUY *Note: We will review Target Prices & Recommendation post detailed Q3FY21 results analysis and conference call of said companies. UR: Un- Rated; Source: KRC & Bloomberg, Data as of January 15, 2021 **Sun Pharma, Lupin and Cadila Healthcare prices have rallied past our target price and will be analysed after Q3FY21 result and conference call details. SECTOR OVERVIEW IPM to post robust growth going forward: Pharma companies are expected to continue their stellar performance in Q3FY21, after recovering from Covid-19 driven disruptions in previous quarters. Q2FY21 management commentary suggested robust growth opportunities from US and other export markets for Indian Pharma Companies, along with opportunities arising from Covid-19 related challenges in the Indian Market. New product approval from USFDA is expected to further fuel the growth trajectory of Indian Pharma Companies. Q2FY21 witnessed recovery in Indian Pharma sector post opening of the economy and increased demand for pharmaceutical products on account of Covid-19 pandemic and Q3FY21 is expected to strengthen the growth trajectory with Indian Pharmaceutical Markets (IPM) growing at 9.6%/1%/8.5% YoY respectively, for October/November/December. For Q3FY21, we expect our coverage universe to post 12.3% YoY growth in sales. From our coverage universe, we expect all the pharma companies to report growth in their operating metrics. Granules India (+16.0% YoY), Glenmark Pharma (+15.0% YoY), Cadila Healthcare(+15.0% YoY) to post highest growth in revenue in Q3FY21.
Margin to expand YoY, though be lower compared to Q2FY21: For our coverage universe, we expect EBITDA to report robust 28.1% YoY growth (-0.7% QoQ). Pharma companies to continue to benefit from lockdown led reduction in SG&A expenses in Q3FY21. EBITDA margin is expected to expand 281bps YoY to 22.8% in Q3FY21 (down 99bps QoQ). Overall net profit for the coverage universe to increase 71.8% YoY (0.8% QoQ) on account of lower base last year.
Sector Outlook and Valuation: Growth momentum to pick up: Indian pharmaceutical companies are better placed to harness opportunities and post healthy growth going ahead. Indian companies are amongst the most competitive ones globally and hold a sizeable market share in most developed as well as other markets which would place pharmaceuticals companies in a higher earnings growth trajectory as compared to slow earnings growth in the recent past. Backed by positive news flow, industry tailwind & flight of capital towards defensive sectors, Nifty Pharma has rallied ~59.4% in 1-year period and 0.8% YTD. We believe that there is still stock specific upside in the Indian Pharmaceutical space. Our top picks in the sector are Aurobindo Pharma (injectables & new launches) & Alembic Pharma (Chronic portfolio). We like Glenmark Pharma for attractive valuation at current levels (weighed down by higher leverage), but industry beating growth in IPM paints an optimistic picture. Cipla to continue to benefit from respiratory launches & COVID-19 portfolio.
ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS
INR Mn Q3FY21E Q3FY20A YoY Q2FY21A QoQ Remarks Sun Pharmaceutical Industries
Sales 90,775 81,549 11.3% 85,531 6.1% Sun Pharma's Sales for the quarter to grow 11.3% YoY backed with improving performance in the US as well as domestic businesses. EBITDA 23,602 17,596 34.1% 23,096 2.2% EBITDA margin to improve to ~26.0% in Q3FY21 due to expected pick-up Adj. Net in specialty portfolio and continued cost savings in other expenses due 15,900 9,135 74.1% 15,900 0.0% Profit to COVID-19. In line with the EBITDA growth, we expect a ~74% YoY EBITDA growth in the Net Profit. 26.0% 21.6% 442 bps 27.0% -100 bps (%) Key Parameters: (1) Ram-up in specialty portfolio NPM (%) 17.5% 11.2% 631 bps 18.6% -107 bps
Dr. Reddy’s Laboratories
Sales 50,505 43,971 14.9% 49,109 2.8% Revenue is expected to grow at 14.9% YoY in Q3FY21. EBITDA to EBITDA 12,626 10,313 22.4% 12,342 2.3% accordingly grow by ~22.4% YoY, resulting in EBITDA margin expansion by 155bps to 25.0% in Q3FY21. Adj. Net Profit to be flat YoY on account Adj. Net 7,866 7,816 0.6% 8,499 -7.4% of lower tax last year. Profit EBITDA 25.0% 23.5% 155 bps 25.1% -13 bps Key Parameters: (1) Impact of cost rationalization (2) Performance of (%) COVID19 drugs Remdesivir & Favipiravir NPM (%) 15.6% 17.8% -220 bps 17.3% -173 bps
Cipla
Sales 48,996 43,710 12.1% 50,383 -2.8% Incremental sales from Albuterol & COVID-19 drug portfolio to help post 12.1% YoY growth in revenue. EBITDA margin to continue to EBITDA 10,779 7,583 42.1% 11,766 -8.4% benefit from cost savings, and expand 465 bps YoY to 22.0%, though at Net reduced level compared to previous quarter. PAT to grow at 79% YoY 6,283 3,510 79.0% 6,654 -5.6% Profit backed by robust operating performance EBITDA 22.0% 17.3% 465 bps 23.4% -135 bps (%) Key Parameters: (1) Ramp-up in Albuterol (2) COVID-19 drug portfolio performance NPM (%) 12.8% 8.0% 479 bps 13.2% -38 bps Lupin Sales 41,462 37,693 10.00% 38,350 8.11% Revenue is expected to grow ~10.0% YoY due to pickup in domestic and EBITDA 5,805 4,291 35.28% 5,812 -0.12% US business with new launches. EBITDA margin to expand by 262bps Adj. Net YoY to 14.0%. Lupin is expected to report Adj. PAT of INR 2,725mn vs 2,725 -5,852 NA 2,135 27.64% Profit loss last year. EBITDA 14.00% 11.38% 262 bps 15.15% -115 bps (%) Key Parameters: (1) Performance of new launches like gProair, Glumetza, Tykerb and others (2) Ramp-up in Levothyroxine & re-launch NPM (%) 6.57% NA NA 5.57% 101 bps of Metformin in the US
Aurobindo Pharma
Sales 65,425 58,950 10.98% 64,834 0.91% Aurobindo Pharma to report strong revenue growth of 10.9% YoY on EBITDA 14,393 12,080 19.15% 14,328 0.46% the back of core markets of the US & Europe as well as ARV business. EBITDA margin to expand 151bps YoY to 22.0%. While PAT to grow at Adj. Net 23.8% YoY with better product mix. 8,780 7,094 23.76% 8,062 8.90% Profit EBITDA Key Parameters: (1) New product launch momentum in the US (2) 22.00% 20.49% 151 bps 22.10% -10 bps (%) Revival of injectable sales in the US post COVID-19 led decline in elective surgeries (3) Performance of ARV business NPM (%) 13.42% 12.03% 139 bps 12.44% 98 bps
ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS
INR Mn Q3FY21E Q3FY20A YoY Q2FY21A QoQ Remarks Cadila Healthcare
Sales 41,838 36,381 15.0% 38,200 9.5% Cadila to post 15.0% YoY revenue growth backed by improved performance in US market. EBITDA margin to improve to 21.0% EBITDA 8,786 6,978 25.9% 8,634 1.8% because of lower other cost due to savings in travelling and other expenses in the wake of COVID-19. Robust operating performance to Adj. Net 5,770 3,739 54.3% 4,734 21.9% boost PAT by 54.3% YoY. Profit EBITDA 21.0% 19.2% 182 bps 22.6% -160 bps Key Parameters: (1) Incremental revenue from COVID-19 products (2) (%) Competition in levorphanol (3) Performance of AndroGel (4) New launches NPM (%) 13.8% 10.3% 351 bps 12.4% 140 bps
Glenmark Pharma
Sales 31,459 27,356 15.00% 29,525 6.55% Glenmark to report revenue growth of 15.0% YoY due to stellar performance in the domestic market led by FabiFlu. Lockdown cost EBITDA 5,663 4,401 28.67% 5,528 2.43% saving to continue in and improve EBITDA margin by ~191bps YoY. PAT Adj. Net is expected to improve by 26.4% YoY due to robust operational 2,413 1,908 26.44% 2,309 4.52% Profit performance. EBITDA 18.00% 16.09% 191 bps 18.72% -72 bps (%) Key Parameters: (1) Development on debt repayment (2) FabiFlu performance NPM (%) 7.67% 6.98% 69 bps 7.82% -15 bps
Alembic Pharmaceuticals Sales 13,542 12,091 12.0% 14,571 -7.1% EBITDA 3,995 3,251 22.9% 4,434 -9.9% Alembic Pharma to report 12.0% YoY growth in revenue with new product launches/traction in the existing products in the US. Domestic Net 2,913 2,342 24.4% 3,334 -12.6% market to see recovery from COVID-19 impact. We expect EBITDA/PAT Profit to grow by 22.9%& 24.4%, YoY respectively. EBITDA 29.5% 26.9% 262 bps 30.4% -93 bps (%) Key Parameters: (1) Status of Sartan shortage (2) New product launches (3) API sales NPM (%) 21.5% 19.4% 214 bps 22.9% -137 bps
Torrent Pharma
Sales 21,584 19,660 9.8% 20,170 7.0% Torrent Pharma to report 9.8% YoY growth in revenue due to growth in EBITDA 6,259 5,400 15.9% 6,350 -1.4% the domestic market. EBITDA margin to expand with cost savings due to reduced expenses. In line with the operational performance, PAT to Adj. Net 2,797 2,510 11.4% 3,100 -9.8% grow at 11.4% YoY. Profit EBITDA 29.0% 27.5% 153 bps 31.5% -248 bps Key Parameters: (1) Revival in the domestic business (2) Regulatory (%) clearance (3) Business in Germany & Brazil NPM (%) 13.0% 12.8% 19 bps 15.4% -241 bps
Granules India
Sales 8,166 7,040 16.0% 8,581 -4.8% Granules India to continue to benefit from increasing mix towards FD EBITDA 2,286 1,631 40.1% 2,564 -10.8% & to report 16.0% YoY increase in revenue. Better product mix and better pricing in API to help EBITDA margin improvement to 28.0%. In Net line with better operational performance, we expect PAT growth of 1,381 961 43.8% 1,636 -15.6% Profit 43.8% YoY. EBITDA 28.0% 23.2% 482 bps 29.9% -190 bps (%) Key Parameters: (1) New product launches (2) Improvement in product mix towards FD (3) Performance of 5 core API molecules NPM (%) 16.9% 13.6% 327 bps 19.1% -220 bps
ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS
Nifty Pharma Vs Nifty Performance 140 120 100 80
60
Jan-18
Apr-19
Dec-19
Dec-18
Apr-20
Aug-19
Aug-18
Dec-20
Aug-20 May-18
Nifty Pharma Nifty
Source: Bloomberg, KRChoksey 50 Nifty Pharma PE (3Y TTM) 37 Nifty PE (3Y TTM) 35.2 43.7 40 32 35.4 27 27.8 30 29.2 24.6
22 21.4 23.0 20 17
10 12
Jul-19
Jul-18
Jul-19
Jul-18
Jul-20
Jul-20
Jan-21
Jan-21
Jan-19
Jan-18
Jan-19
Jan-18
Oct-19
Oct-18
Oct-18 Oct-19 Apr-18 Apr-19
Apr-19
Apr-18
Jan-20
Jan-20
Oct-20
Oct-20 Apr-20 Apr-20
Nifty Pharma PE Avergae +1SD -1SD NIFTY PE Avergae +1SD -1SD
Source: Bloomberg, KRChoksey Source: Bloomberg, KRChoksey
Coverage Stock YTD Return (%) Coverage Stock 1Y Return (%)
Granules India 1% Granules India 160% Dr. Reddy's 0% Dr. Reddy's 79% Aurobindo Pharma 2% Aurobindo Pharma 93% Cadila Healthcare 2% Cadila Healthcare 86% Alembic Pharma 5% Alembic Pharma 92% Cipla 1% Cipla 70% Torrent Pharma -3% Torrent Pharma 43% Glenmark Pharma 4% Glenmark Pharma 48% Lupin 12% Lupin 46% Sun pharma 2% Sun pharma 35%
-5% 0% 5% 10% 15% 0% 50% 100% 150% 200% Source: Bloomberg, KRChoksey; Closing prices as of 15th January 2021. Source: Bloomberg, KRChoksey; Closing prices as of 15th January 2021.
ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS
Rating Legend (Expected over a 12-month period)
Our Rating Upside Buy More than 15% Accumulate 5% – 15% Hold 0 – 5% Reduce -5% – 0 Sell Less than – 5%
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ANALYST KRChoksey Research Phone: +91-22-6696 5555, Fax: +91-22-6691 9576 Parvati Rai, [email protected], +91-22-6696 5413 is also available on Bloomberg KRCS