Given the growth recovery seen in the domestic market, huge patent opportunities in the US over the next 12-18 months (drugs worth $50 billion going off patent) and a favourable currency movement—the rupee has depreciated by 15% in the last six months against the dollar—we believe that the pharmaceutical sector is in the sweet spot. We expect an earnings upgrade of 2-8% for Divi’s Laboratories Ltd, Cipla Ltd, Sun Pharmaceutical Industries Ltd and Lupin Ltd for FY13 if we consider a conversion rate of Rs 50 against the dollar compared with our current rate of Rs 46. In order of preference, we remain positive on Lupin, Dr Reddy’s Laboratories Ltd, Cipla and Glenmark Pharmaceuticals Ltd. While we do not have a formal rating on Divi’s Laboratories, it seems to be the biggest beneficiary of rupee depreciation among peers.
Indian pharma to benefit from growth influx in domestic market: Growth in November was robust reflecting an all-round performance across therapies. Acute segment, struggling over the last few months, has made a strong comeback with 20% growth in November against 11% in October and 12.6% in September, driven by the recovery in anti-infectives and gastrointestinal segment. Chronic segment continued to depict a firm trajectory with central nervous system segment recovering from the lows of October and growing 18% in November. The strong bounce back in anti-infectives reflected in the growth of IPCA Laboratories Ltd (30%), GlaxoSmithKline Pharmaceuticals Ltd (23%), Cipla (16%) and Ranbaxy Laboratories Ltd (14%). Other major private companies in anti-infectives, Mankind Pharma Ltd, Alkem Laboratories Ltd and Macleods Pharmaceuticals Ltd, also showed robust growth. Recovery in anti-infectives was cited from an increase in hospital treatments.
As October-December quarter is seasonally the best time for respiratory segment, the growth has picked up from 7-8% in July-September quarter to 25% for November. Cipla would be the beneficiary of an improved traction in respiratory segment.
Further, anti-malaria sales were good in a seasonally weak month.
Companies to cash in on rupee depreciation: Rupee depreciation is a positive for Indian pharmaceutical on being the net exporters. The extent of impact varies though on aspects such as net forex exposure, forward cover taken, operating leverage, near-term debt repayment and interest liabilities in forex.
Timing of gain or loss realization will depend on the extent of forex hedging done by companies. Most firms except Ranbaxy has hedges for next three-four quarters at an average rate of Rs 47-48. We have not considered the translation impact of forex on earnings given that this is a non-cash impact arising out of mark-to-market of long-term foreign debt. Firms like Divi’s Laboratories, Cipla, Sun Pharma and Lupin are likely to gain the most.
Higher currency peg to lift earnings by 2-8%: While pharmaceutical sector has outperformed the broader market in the last three months, valuations have come off the peak. We, thus, continue to prefer a stock-specific approach to remain overweight on the sector as a whole.
Edited excerpts from a report by Edelweiss Securities Ltd. Comment at firstname.lastname@example.org
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