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1QFY22 Review: More misses than hits; challenges in US resurface

Indian Pharma’s 1QFY22 earnings performance significantly undershot street expectations, despite domestic growth across the board surprising on the upside on the back of Covidrelated tailwinds, with multiple challenges on the US generics front now reemerging. Our pharma coverage universe posted a 17% YoY growth in revenue with EBITDA and PAT witnessing 16% and 28% YoY growth respectively. 4/12 companies in our coverage universe delivered a beat on our estimates with only Sun Pharma and Cipla witnessing meaningful earnings upgrades.

Domestic formulations and RoW (47% YoY & 12% YoY growth respectively for our coverage universe) markets were the key growth drivers during the quarter. Overall domestic growth remained higher than the growth in the broader market (market growth of 37% YoY), ahead of our expectations, owing to significantly higher contribution from the Covid portfolio.

The performance on the margin front was mixed even as margins at an aggregate level witnessed sequential improvement (+200 bps QoQ), despite GM pressures, aided by Covidrelated disruptions and lower opex. We expect a part of the savings witnessed during the quarter to remain sticky with companies continuing to focus on cost control initiatives and rationalization of R&D spend given a muted near-term US outlook.

Multiple headwinds including increased competitive intensity & higher price erosion in the base business, absence of supply disruption-related opportunities and lack of new approvals given delays in domestic FDA inspections resulted in a much weaker-than-expected US generics performance during the quarter with smaller players expected to continue to be aggressive on pricing to maintain market shares. A high 1Q base, which benefited from pre-buying, resulted in a decline in API revenue for our coverage universe, marginally below our expectations. The sector-wide balance sheet improvement story continues to play out with Cadila, Sun & Torrent continuing.

The sector-wide balance sheet improvement story continues to play out with Cadila, Sun & Torrent continuing to pare debt and Cipla improving its net cash position. Continued delivery on cost optimization, GM uptick aided by an increase in domestic contribution to the overall mix and an increase in contribution from Covid-related opportunities (Sputnik scale-up & ZyCoV-D launch remain key monitorables on the vaccine front) will remain key upside triggers. Domestic growth, expected to be aided by a low FY21 base, is likely to be a key near-term earnings driver. Incremental pricing pressures in US could pose downside risks in the near term. We continue to prefer Sun Pharma given a strong earnings momentum with Alembic, Strides and Jubilant Pharmova offering a favourable risk-reward post the recent correction.

* US, API & RoW performance undershoot expectations: US performance was much weaker-than-expected (+7% YoY, -4% QoQ) with all companies in our coverage universe (ex-Sun Pharma) missing estimates and witnessing a sequential decline in revenue (ex-Sun Pharma & Cipla). API revenue for our coverage universe declined by 11% YoY (+13% QoQ) given the benefits of stocking witnessed in the base quarter. RoW growth witnessed some sequential improvement (+12% YoY vs. +10% YoY in 4QFY21; +2% QoQ), albeit below our expectations with 8/10 companies in our coverage universe missing estimates.

* Domestic growth aided by higher Covid contribution: Domestic growth for our coverage universe (+47% YoY, +33% QoQ) remained higher than the overall market growth. Growth across the board was ahead of our expectations with all companies in our coverage universe beating estimates owing to significantly higher contribution from the Covid portfolio and a recovery in acute sales. The expected decline in Covid contribution notwithstanding, near-term domestic growth will continue to benefit from a low base with the benefits of a favorable base visible in the secondary growth data for July’21.

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