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Our 2Q23e factors an improvement in earnings over 1Q considering a lean base of Covid, domestic growth, stable US pricing scenario and lower cost inflation. We expect a high single digit topline gowth for our pharma coverage with flattish EBITDA. Domestic business is expected to deliver high single digit (LPC, ZYDUSLIF, DRRD, Cipla) to double digit growth (TRP, IPCA, SUNP) on a lean Covid base. US price erosion appears to be stable for most companies as US FDA continues to ramp up inspections and approvals. gRevlimid is expected to drive earnings and recapitalise balance sheet for DRRD, NTCPH, Cipla, and ZYDUSLIF. SUNP’s specialty outperformance, Cipla’s Lanreotide and BIOS’ Semglee ramp up is expected to continue this quarter. Diagnostic companies are likely to see healthy mid-teens growth in non-Covid patient volumes with margins hovering around pre-Covid levels. Aster DM is expected to report healthy growth in India biz with GCC earnings skewed towards 2H. We expect margins to remain subdued but improve sequentially for LPC (10% vs. 4%), ALPM (14% vs. 9%) and IPCA (20% vs. 18%). Going forward, we expect earnings to further gain momentum.

Domestic growth- a priority:

Most companies under our coverage are expanding their domestic footprint either organically (MR additions- IPCA, SUNP, TRP) or inorganically (TRP, DRRD, NTCPH). TRP recently announced INR 20bn acquisition of Curatio while DRRD and NTCPH have alluded to domestic acquisitions as a part of their capital allocation strategy. We expect the likes of LPC and DRRD to report mid to high single digit growth while others are expected to report double digit growth in 2Q. It is pertinent to note that DRRD had high Covid and Sputnik contribution in 2Q22. TRP, IPCA and SUNP are consistent IPM outperformers. Increasing India contribution is expected to drive margin improvement particularly for IPCA, SUNP and DRRD. Notably, NTCPH’s domestic business is growing 20%+ (per IQVIA) in the last few months.

gRevlimid to drive US earnings

: DRRD, NTCPH, Cipla and ZYDUSLIF are key beneficiaries of Revlimid this quarter with DRRD presently having 180 day exclusivity for 2 strengths (all strengths launched in Sep’22). We believe gRevlimid will lead to healthy cash generation (as observed in NTCPH) providing sufficient headroom for domestic acquisitions and fresh R&D (particularly for US markets). LPC is expected to see some respite in US sales this quarter (USD 147mn vs. USD 121mn QoQ). Cipla’s Lanreotide ramp-up, Revlimid launch and Albuterol moderation is expected to play out this quarter. ALPM’s US business, in our view, will remain range-bound (USD 45-55mn) over the near term till new launches including injectables come into play. We expect SUNP’s specialty outperformance to continue led by Ilumya, Cequa and Winlevi. BIOS’ biosimilars revenue is expected to remain steady as Semglee ramps up; Serum’s vaccine contribution 3Q onwards is expected to be a key trigger for the stock. NTCPH is likely to have a dip in profit share recognition sequentially as directed by the management but we expect their Agro-Chem business to ramp up significantly post the positive litigation outcome.

Diagnostic companies to see sequential growth; Aster DM 2H heavy

: We expect 17% growth in non-Covid patient volumes for both Dr Lal and Metropolis with margins improving 140bps to 24.8% and 100bps QoQ to 25.5% respectively. Vijaya diagnostics operationalized their Punjagutta and Rajahmundry centres in 2Q. We expect 15% growth in non-Covid business with 40%+ margin in 2Q. Krsnaa Diagnostics is expected to deliver 15%YoY growth in revenue driven by ramp up of Punjab centres. Aster DM is expected to deliver healthy growth in India business, in line with the industry, while GCC clinics is expected to see some moderation owing to a high Covid base last year. Aster DM’s EBITDA is skewed towards 2H on account of seasonality in GCC business.

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