Q2FY23 preview: Modest revenue growth, Ebitda decline seen in pharma cos

Analysts expect pharmaceutical companies to post modest revenue growth in the July-September quarter (Q2) of FY23, while the earnings before interest, tax, depreciation and amortisation (Ebitda) are expected to decline, led by high base and normalised expenses. While the domestic market demand is strong, analysts expect higher raw material and freight costs to affect business in the US and other countries.

As for hospitals and diagnostics, a healthy year-on-year (YoY) performance is expected driven by recovery in the base business. Edelweiss Securities said, “Hospitals are likely to post a strong operating showing driven by rising occupancy and stable average revenue per occupied bed (ARPOBs), and traction in international patients. Diagnostics would benefit from seasonality; overall performance stays bleak amid heightened competition.”

ICICI Securities’ analysts said that pricing pressures have started slowing down in the US with the expectation of normalisation in coming months. “We expect the EBITDA margin of our coverage companies to decline by 240 bps YoY to 20 per cent,” it said. Edelweiss, too, pointed out that US price erosion is marginally receding, and improved launches to ease gross margins.

As for the US market, Dr Reddy’s Laboratories (generic Revlimid), Lupin (generic Suprep) and Sun Pharma (specialty) and Cipla (respiratory) are seen gaining share.

Prabhudas Lilladher (PL) analysts, however, said, “We see strong sequential growth aided by niche launches in the US, steady domestic formulation business and easing of overheads like freight, commodity prices. The benefit of rupee depreciation versus the dollar (+7 per cent YoY and 3 per cent QoQ) will also aid profitability. On the flip side, profitability will be negatively impacted by Emerging markets currency volatility.”

Edelweiss said that the domestic momentum remains strong and Torrent Pharmaceuticals, Ajanta Pharmaceuticals and Sun Pharmaceutical will lead in this segment. It added that domestic price hikes and easing input costs would improve the gross margins by 100 bps quarter-on-quarter.

Torrent Pharmaceuticals posted a 13 per cent YoY rise in its India business during the quarter to Rs 1,224 crore. According to AWACS, Torrent Pharma’s growth in Q2 was 19 per cent versus the Indian Pharmaceutical Market (IPM) growth of 13 per cent.

IQVIA data for July-September 2022 shows IPM grew 8.2 per cent YoY in value terms. Volumes were flat YoY during Q2FY23. ICICI Securities said that acute segments witnessed a subdued growth during the quarter – anti-infectives grew 7.2 per cent, while respiratory was up 4.2 per cent, YoY. Chronic products segment drove sales in the market – cardiac, neurology and anti-diabetic grew 10.1 per cent, 9.8 per cent and 7.8 per cent, respectively.

Hospitals, on the other hand, are on strong footing this quarter.

Edelweiss said that Apollo Hospitals’ occupancy returned to 64 per cent in June after a tepid April and May, and it was sustained in Q2FY23. “Fortis Healthcare’ hospitals have shown good recovery with 67 per cent occupancy, but that is marred by a poor SRL performance. In diagnostics, (there is) some respite due to the strong season, but growth is still likely to be below pre-Covid. Moreover, increased competition may intensify the pressures on prices,” the analysts added.

Dr Lal Pathlabs (excluding Suburban Diagnostics) overall revenues are expected to increase by 1 per cent YoY due to the high Covid-19 base. “Excluding Covid-19, it is expected to post 11 per cent YoY growth due to improved volumes in the industry. We build in Suburban revenues for a full quarter of Rs 44.6 crore with a low margin profile… As a result, Ebitda margins (after ESOP) are likely to be 25 per cent, a decline of 340 bps YoY but an improvement of 160 bps QoQ,” Edelweiss said.