Thursday, 28 November 2013

Earnings Season Snapshot - H1 FY 2013-14 - Pharma Sector

The pharmaceuticals industry in India has been the flavour of the market with its low beta nature and its standing as a wealth creator from the perspective of last 5yrs. It is one of the sectors which is affected minimally due to the domestic macro-economic condition as most of the business of this sector comes from outside India.

Sector As a Whole :

True to the image, the pharma industry has been able to grow its top-line and bottom-line with better EBITDA margin with the rupee depreciation helping a long way. The H1 figures of FY 2013-14 show that the top three companies have grown their sales by around 50% YoY along with corresponding increase in profits. 

Some performance glimpses :

Q2 data YoY

Sun PharmaDr. Reddy'sLupinCipla
Sales (in Cr)4192 vs 26573357 vs 28802631 vs 22392302 vs 2145
Profit (in Cr)1559 vs 435690 vs 404417 vs 297358 vs 488

We can clearly see that most of the companies have been able to double their profits in last 5yrs. Sun Pharma stands out with more than 100% growth to achieve a consolidated holding position. Only Cipla was not able to show any positive figures out of the pack in Q2. We still maintain that the company is a good bet amongst the large caps.

Takeaways :

Pharma companies have inherent risk of patent infringement and resulting lawsuits, non-compliance with the stringent requirements of various regulatory bodies like the USFDA and approval of generic drugs (Abbreviate New Drug Application ). They require good and compliant manufacturing facilities, state of the art R&D facilities and a constant product pipeline. It is for this reason that the business is difficult to replicate easily. For a detailed review read our post Sector Snapshot - Pharmaceuticals.

It has been seen that Pharma companies have a low weighted position amongst MF AUM (as low as 5%) but has been a wealth creator from the past 5yrs. Good pharma companies such as Lupin and Dr. Reddy’s are still giving return opportunity to investors. Other mid-cap companies like Wockhardt, IPCA labs, Aurobindo Pharma, Glenmark, Cadila etc. are also finding their place in the value investors portfolio.

Due to the recent growth in top-line and bottom-line of these companies, the Pharma companies are in for a re-rating in stock prices, specially the Mid-caps of the sector. Indian companies are now better placed in the last one decade to grow in reach and expand themselves. The present low growth and high inflation scenario is a good time to scan good companies in this sector to hold stocks as direct equity.

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