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Another quarter of muted EBITDA Steady domestic business; currency tailwinds to bolster exports


MUMBAI, (GNI): We expect EBITDA growth of 7% YoY and 9% QoQ for our pharma universe in Q3FY19E, aided by steady domestic business. Further, currency tailwinds (barring the real & the rouble) would continue to bolster exports. In USD terms, US business is likely to see revenue growth, up 7.8% QoQ, aided by new launches and Q3 seasonally being a strong quarter in terms of antibiotics (Cephs) and flu-related sales.  Among our coverage universe, we expect EBITDA growth of 41.7% YoY for Glenmark (low base & Q3FY18 had forex loss), Torrent Pharma at 50.6% YoY (Unichem consolidation) and Sun Pharma at 16.2% YoY (low base & Halol resolution). Cadila profitability may dip by 7.7% YoY as Q3FY18 had limited competition products in the US while Cipla EBITDA dip by 4.8% on supply issues & lower tender offtake.

Likely sequential improvement in US sales: We expect a 6-18% YoY decline in US sales for Dr Reddy’s, Lupin and Cadila, given increased competition in some high value products. However, Aurobindo and Cipla should see 10-19% YoY growth on new launches and order wins while Torrent Pharma at 38% YoY growth may be led by Bio-Pharma consolidation. Sun Pharma would continue to see 7.5% improvement YoY in non-Taro US sales, led by ramp-up in specialty sales & supplies after Halol resolution. We see 23% QoQ growth for Cadila and 12% QoQ for Cipla, aided by new launches, while Lupin’s QoQ growth of 11% would be led by antibiotics and Tamiflu sales, given Q3 is seasonally strong. Further, benefits of Valsartan shortage would continue to bolster sales for Aurobindo QoQ.

Pharma sees limited scope of multiple re-rating: The BSE Healthcare Index has underperformed the Sensex by 7% on weak Q2 numbers and negative news in case of Sun Pharma-related to corporate governance and whistleblower issues. Despite the fall, the stocks are still trading rich at valuations of 15-26x FY20E earnings, and we see limited scope of multiple re-rating; we believe stock price performance will be a function of earnings upgrade. We prefer firms with strong domestic franchises and better visibility in the US. Our top picks remain Aurobindo, Torrent Pharma, Ipca Labs & Strides Pharma.

Apollo Hospitals drives hospitals space growth: We see EBITDA growth of 15.5% YoY for our hospitals universe, led by growth in Apollo Hospitals (14% YoY), given broad-based growth. Narayana Hrudayalaya and Healthcare Global Enterprises also would see EBITDA growth of 12-21% YoY, aided by low base and ramp-up in newer hospitals, but it will continue to drag PAT, given higher depreciation and interest cost. Listed hospital firms had undergone an aggressive investment phase, which is nearing the end. Most firms are consolidating existing operations before adding new ones. The platform is set for future growth and accelerated profitability over the medium term. Mature hospitals still contribute 70-90% of overall EBITDA, underscoring this big shift in operating dynamics. We retain our positive stance on hospitals.ends

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