The first quarter of 2007-8 has been average for most pharmaceutical companies. Many companies reported high “other income” on account of marked-to-market gains on their foreign currency borrowings (FCCBs and ECBs). These gains are generally unrealised. As most FCCBs are to be converted at a fixed dollar rate in the future, these gains are likely to be reversed in the books upon conversion.
Material costs for mainline companies were lower this quarter as active pharmaceutical ingredients (API) and intermediate imports are largely dollar-denominated. Net profit has improved for some generics players due to higher margins and authorised generic launches. China has slashed export incentives from 13% to 5% and enforced stricter pollution norms for API players which have affected the global bulk drug market as a lot of supply is from China.
However, with the appreciation of the rupee against the dollar, the net impact of rising API prices has been marginal for most companies. We estimate most frontline stocks to continue with their lukewarm performance during 2007, given the absence of significant near-term triggers.
Sun Pharma: Sun’s operating results for the first quarter of 2007-8 were marginally below estimates. Net sales were at Rs 610 crore, up 23% from last year, while net profit was up 29% at Rs 230 crore. At the current market price of Rs 971, the stock trades at 21.7 times 2007-8 estimated EPS of Rs 45.4 and 17.1 times 2008-9 estimated EPS of Rs 55. Given its strong growth prospects and the likelihood of further acquisitions in the near-to-medium term, we maintain our sector outperformer rating on the stock.
Biocon: Its first quarter numbers were in line with our estimates, with net sales at Rs 270 crore (up 28.1% from last year) and net profit at Rs 53 crore (up 34.5%). At Rs 480 the stock trades at 20.2 times 2007-8 and 16.9 times 2008-9 estimated EPS of Rs 23.8 and Rs 28.3, respectively. We reiterate our sector neutral rating.
Cadila Healthcare: For the first quarter of 2007-8, the company reported sales of Rs 560 crore, EBIDTA of Rs 98.4 crore and adjusted net profit of Rs 73.9 crore. Domestic sales increased 20% to Rs 390 crore over last year. Total exports were at Rs 190 crore, driven by a 70% growth in formulation sales to Rs 130 crore. At Rs 351, Cadila trades at 15.7 times its 2007-8 EPS of Rs 22.4 and at 13.9 times 2008-9 estimated EPS of Rs 25.3.
Cipla: Cipla’s first quarter numbers were well below our estimates, with net sales at Rs 900 crore, up 4.9% compared to last year and EBITDA down 30% to Rs 160 crore. The decline in EBITDA can be attributed to an extremely competitive situation in the US generics market and an unfavorable product mix. At Rs 201, the stock trades at 27.9 times 2007-8 estimated EPS of Rs 7.2. We are downgrading the stock to sector underperformer.
