PL Sector Report: Healthcare - Jul-Sep’23 Earnings Preview – Margins to sustain

Healthcare - Param Desai - Research Analyst, Prabhudas Lilladher Pvt Ltd.

Jul-Sep’23 Earnings Preview – Margins to sustain

We expect pharmaceuticals companies under our coverage to report another strong quarter with EBIDTA growth of 17% YoY (flat QoQ), mainly aided by new launches (gRevlimid, gSpiriva, etc) in US market and higher margins. Benefits of INR depreciation vs USD (+3.6% YoY) will also aid profitability. We expect the quarter to see easing of cost pressures which will aid margins YoY. Base business in US is likely to remain steady. On domestic formulation business; volumes offtake in acute and trade generic segments are likely to remain weak while benefit of price hike in NLEM portfolio and steady growth in chronic portfolio will be seen in few domestic focused companies. Our top picks remain SUNP, JBCP, ERIS and TRP.

♦ LPC, ARBP and ZYDUSLIF to report strong EBITDA growth: Amongst PL universe we expect companies like LPC, ARBP and ZYDUSLIF to report higher EBIDTA growth of 75%, 47% and 44% YoY, aided by strong growth in US market as a result of new launches like gSpiriva in case of LPC and improved margins in case of ARBP. SUNP to report EBIDTA growth of 5% YoY, led by continued growth momentum in Specialty and gRevlimid. CIPLA to report healthy 20% YoY EBITDA growth aided by higher US sales.

♦ Margins to improve QoQ for ARBP, DIVI and IPCA: Companies like ARBP, DIVI, and IPCA will see QoQ margin improvement aided by better product mix and higher GMs. On other hand, ZYDUSLIF may see sharp dip in margins QoQ given lower gRevlimid sales.

♦ Healthy growth for JBCP, ERIS and TRP: JBCP to report EBITDA growth of 24% YoY given underlying strong base business and higher GMs (up 230 bps YoY). In case of ERIS, scale up in Oaknet portfolio and margin improvement will aid EBITDA growth by 22% YoY. Key markets for TRP like India, Brazil and Germany will see healthy YoY growth which will drive EBIDTA growth to tune of 19% YoY.

♦ US sales – stable QoQ: We expect US sales to grow by 14% YoY in constant currency (CC) for our coverage universe aided by launches like gRevlimid, gSpiriva and stable base business. On QoQ basis, we expect flat to moderate decline except LPC which will see growth aided by gSpiriva launch. Among our coverage universe, we expect 17% QoQ and 5% QoQ decline for ZYDUSLIF and SUNP given likely lower sales from gRevlimid and gPentasa respectively. On other LPC will see 13% QoQ growth in US sales. We have factored in $25mn sales for LPC from gSpiriva in Q2FY24.

♦ Sector outperformance will continue: Healthcare Index outperformed Sensex by 9% in July-Sep’23. Our sectoral outlook remains positive led by tailwinds in US generics, healthy domestic formulations segment and normalization in input cost. Henceforth we expect profitability to continue to improve with steady domestic business, niche launches in US market and continued cost optimization. We prefer companies with steady domestic franchises and strong US visibility. Our top picks remain SUNP, ERIS, JBCP and TRP.

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