Brokerages largely have a cautious approach towards the healthcare sector that has reported a mixed bag of earnings for the September quarter. The highlight of the quarter was the launch of 'Revlimid' in the US market which saved the sector, most of them believe.
Brokerage firm Nirmal Bang Institutional Equities underscored that the Q2FY23 performance by its pharma universe (17 stocks) was mainly driven by the 'Revlimid' launch in the US market and USD appreciation against INR (rupee), which was partially offset by continued pricing pressure in the US, the high base of Covid in domestic formulations and cost inflation.
Its universe revenue grew by 8.6 percent year-on-year (YoY) and 7.4 percent quarter-on-quarter (QoQ). US market revenue of selected companies from coverage in USD terms grew by 12.4 percent YoY, but, excluding Revlimid, it grew by merely 1.8 percent YoY.
Most of the mid-cap companies indicated high teen price erosion in the US base business. In domestic formulations, ex- Covid opportunities, almost all coverage companies grew in double digits, driven by price hikes and volume gains, partially supported by seasonality benefit, said the brokerage firm.
"Margins were under pressure in Q2FY23 due to cost inflation, US price erosion and an adverse mix. Among our coverage universe, we like Eris, Cipla, Sun, Torrent Pharma and JB Chemical. While we remain positive on the branded space due to secular growth and strong financials, we have maintained our cautious stance on the developed market generic space, owing to stiff competition and regulatory concerns," said Nirmal Bang.
Brokerage firm JM Financial pointed out that in Q2FY23, its pharma coverage delivered revenue growth of 3 percent YoY and 6 percent QoQ with expected improvement in EBITDA margins. The revenue growth and margin improvement have been driven by US and India outperformance.
The brokerage firm underscored that the US performance was boosted by the 'Revlimid' launch for key players like Dr Reddy's Laboratories, Cipla and Zydus meanwhile Sun Pharma continued its outperformance led by speciality business and the second half of the year is expected to be better.
Lupin and Alembic Pharmaceuticals, in a trend reversal, surpassed expectations as both companies delivered margin improvement.
"Excluding gRevlimid, the US base business for the above companies was stable or marginally negative. We expect the Revlimid to continue supporting the US business for most of the large-cap companies over the next two years and we have valued the opportunity separately based on NPV," JM Financial said.
The brokerage firm observed that the domestic business continues to maintain its growth trajectory backed by acute season, nonetheless, it expects Q3 to be tepid amid seasonality and festivities.
"The medium-term growth in the domestic business is expected to be in the early double digits while price growth will benefit from an elevated WPI index in FY24 as well. The EBITDA margins have started reflecting easing raw material inflation, PLI incentives and cost rationalization although freight costs and marketing spending continue to remain high," said JM Financial.
The performance of emerging markets (EMs) and the rest of the world (ROW) has been mixed as freight costs, the Ukraine conflict and currency volatility impact consistency.
"Diagnostic companies reported a strong quarter with sturdy margins. Wellness contribution increased for Dr Lal PathLabs, Vijaya and Metropolis Healthcare meaningfully. Aster DM’s India business outperformed yet again but GCC's (Gulf Cooperation Council) business was weak albeit expected to improve going forward. Our top picks in the coverage are as follows– Sun Pharma, Dr Reddy's Laboratories, Biocon, Ipca Laboratories and Dr Lal PathLabs," said JM Financial.
Disclaimer: The views and recommendations given in this article are those of the broking firms. These do not represent the views of MintGenie.
