Key points:
- Companies which I am considering here would report almost a 30.9% increase in their revenues for Q1FY2009. Major driver for this mammoth growth would be a steady growth in the domestic market, the new product launches in the regulated markets, strong growth in the contract research and manufacturing services businesses, and the consolidation of the acquisitions made in the previous year. As exports command over 50% share of the pharma industry's revenues, the weaker rupee would also aid the top line.
- The operating profit margin of companies (that are covered here) is expected to expand by 330 basis points, largely driven by exclusivity revenues (Sun Pharmaceuticals), savings arising out of the de-merger of R & D units (Piramal Healthcare) and the effect of operating leverage for companies with a strong top line growth (Lupin and Ranbaxy). On the other hand, rising input, power and fuel costs would negatively affect the margins of companies like Orchid Chemicals and Surya Pharmaceuticals. Wockhardt and Opto Circuits may reel under margin pressure on account of the consolidation of low-margin acquisitions.
- Despite a strong top line growth and a robust operating performance, the reported net profit of companies would grow just by 1.6%. This would be on account of the mark-to-market losses recorded by companies like Ranbaxy Laboratories, Orchid, Wockhardt and IPCA Laboratories (because they have outstanding forex liabilities). Higher interest and depreciation costs (due to acquisitions) would also affect the reported profits in the case of Wockhardt, Cadila and Opto. On excluding the forex impact, the adjusted net profits of these companies might grow by 50.5%.
- My personal top picks include Sun Pharma (which surprised positively with higher than expected exclusivity revenues), and Lupin (which is expected to deliver strong top line and bottom line growth). On the other hand, companies like Ranbaxy, Wockhardt and Orchid could surprise negatively due to higher than anticipated forex losses.
- The key risk to the above estimates is companies reporting mark-to-market losses on hedging instruments or on foreign currency derivatives. I believe Ranbaxy & Wockhardt would have outstanding foreign currency hedges, on which they could incur certain losses.
