Weak performance continues:
We anticipate Q1FY2018 to be a weak quarter due to high base in Q1FY2017 (on account of exclusive opportunities such as gGleevec and gGlumetza) and regulatory and pricing challenges in the U.S. We expect India business to witness a slowdown in growth to 5% (vs. 11% in Q4FY2017) due to GST implementation in July 2017. Although incremental approvals in emerging markets will support sales and earnings growth, regulated market sales are likely to remain under pressure due to heightened competition, pricing pressure, diminishing exclusivity sales, appreciating rupee and delayed key product approvals. Hence, we expect our pharma coverage universe to report weak performance, with sales falling by 0.5%, operating profit margin declining by 630 bps to 21.5% and profit down by 33.2% in Q1FY2018.
Domestic business de-stabilised due to GST; U.S. business to remain under pressure:
On the domestic business front, the Indian pharma market (IPM) grew by 5% during Q1FY2018 (vs. 11% in Q4FY2017) on account of GST rollout in July 2017. U.S. business in Q1FY2018 is likely to face pressure due to high base in Q1FY2017 (on account of exclusive opportunities, launch of blockbuster drugs such as gGleevec and gGlumetza), regulatory concerns around key manufacturing facilities, rupee appreciation and increased competition adding to existing pricing pressure.
Outlook: Cautious FY2018 will be full of hurdles, caution advised:
The sector is already under stress and appreciating rupee is going to be an additional challenge in FY2018. We shall keenly monitor FDA remediation updates, key product approvals, management commentary and outlook along with USD/INR rates, as these would decide earnings upgrades/ downgrades for FY2018 and FY2019. Therefore, we advise caution.
Valuation: Not in the comfort zone, no preferred pick Valuations:
Most pharma companies in our coverage universe are trading at 12-19x FY2019E earnings, of which frontline stocks are trading at close-to-peak valuation, which is not a comfortable investment zone, and risk reward looks unfavourable. Currently, we do not have any preferred pick in the sector. We advise investors to wait for more clarity and a better entry point for fresh investment.
Earnings outperformers in Q1FY2018: Glenmark Pharma
Earnings laggards in Q1FY2018: Cipla, Divis, Lupin, Sun Pharma and Torrent Pharma
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