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A moderate quarter in the offing

We expect a moderate Q4 for the companies under coverage, with yoy revenue, EBITDA and earnings growth of 5%, 22% and 25%, respectively. This will be driven by: 1) 10% growth in the India business for our coverage universe; 2) recovery in branded markets; 3) continued cost savings yoy; and 4) Wockhart acquisition impact for Dr Reddy’s. EBITDA margin is expected to expand by ~300bps yoy for our coverage. Sequentially, we expect revenue, EBITDA and PAT to decline by 3%, 10% and 19%, respectively. The decline in the topline and profitability will be due to: 1) seasonally weak India business; 2) decline in Covid-19 portfolio sales; 3) ramp-up in other expenses; and 4) higher personnel expenses. India revenue is expected to decline 10% qoq due to seasonality and weaker Covid portfolio performance for select companies. EBITDA margin will be impacted by the reversal of Covid-related cost savings. In our view, Sun Pharma (Buy) has the potential to beat our and consensus estimates on an uptick in the specialty portfolio.

* Modest sequential growth in the US business: We expect US revenue to grow in lowto mid-single digit for all except Aurobindo. Cipla is expected to post the highest qoq growth on share gains in the Albuterol market and other new launches. On the other hand, Aurobindo’s US revenue is expected to decrease due to the divestment of the Natrol business, offset in part by new product launches. Sequential revenue increase for Sun Pharma will be on the back of ramp-up in specialty products such as Ilumya and Cequa. Lupin lost market share in Albuterol in the initial part of the quarter but has regained some of the lost market share in March. We expect low-single digit sequential growth for Lupin.

* India revenue to grow in mid-single digits to low-double digits yoy: Secondary sales data from AIOCD and IMS suggest modest growth for the Indian Pharma Market (IPM) in Q4. AIOCD data suggest that IPM grew 6% in Q4, in line with Q3. Similarly, IMS data for October and November suggest IPM growth of 5% (for the first two months of Q4) vs. 8% growth in Q3. Cipla and Cadila, which have sizeable Covid portfolios, are expected to post low-teens growth while Dr. Reddy’s is expected to post ~33% yoy growth due to the Wockhardt acquisition. On the other hand, Sun Pharma, Lupin and Ipca are expected to post mid-single digit growth, in line with the IPM.

* Opex to increase modestly qoq: Cost savings due to hampered field-force activity in the branded market will drive EBITDA margin improvement yoy. However, with the easing of Covid-19-related restrictions, marketing and selling expenses are expected to move up. For our coverage companies, we expect other expenses to go down by ~180bps yoy but increase ~100bps qoq.

* Sun Pharma could surprise positively: Sun Pharma could surprise positively given their strong momentum in the US and ramp-up in the specialty portfolio. In the absence of any notable product launches in the US, we expect an in-line quarter for others.