The headwinds for the sector include a slowdown in domestic formulation and seasonal weakness, persistent pricing pressures in the US, higher raw material costs, energy prices and freight costs and reduced occupancy in hospitals because of the Omicron wave in Jan-Feb.
“We forecast aggregate revenue/EBITDA growth at 11%/4% y-y for our coverage universe in 4QFY22F. Net earnings will likely decline by 4% y-y, on our estimate, adjusted for one-time loss for SUNP (Sun Pharmaceuticals) due to the anti-trust litigation settlement,” the global firm said in a note.
Companies with high-cost overheads and weak seasonality could be hit the hardest when it comes to the earnings in the previous quarter, Nomura’s analyst wrote.
The global firm said that the companies whose earnings could disappoint the least were Torrent Pharma, Gland Pharma, Zydus Lifesciences and Dr Lal Pathlabs.
The firms which could face a larger hit on earnings are Lupin, Fortis and Apollo Hospitals, the research report said.
Nomura has a buy call on Torrent Pharma, Zydus Lifesciences, Lupin, Fortis and Apollo Hospitals, a neutral rating on Gland Pharma and a reduce call on Dr Lal Pathlabs.
Going ahead, the global firm expects margin pressures to reduce along with a recovery in volumes.
“We also note that the prices of raw materials and logistics are significantly elevated and any moderation can help revive earnings growth. We also expect new product launch intensity in the US to improve going forward.”
Data released by AIOCD AWACS hints at a slowdown in growth, with that in the previous quarter at 3.6 per cent, sharply lower than 5.5 per cent in the third quarter of FY22, Nomura’s analysts wrote.
Sun Pharmaceuticals, Torrent Pharma and IPCA have registered a higher rate of growth than the broader market, the report said.
Meanwhile, sales in the previous quarter were hurt by voluntary deferment to the present quarter as price hikes on products on the National List of Essential Medicines kick in.
“The excess sales on account of COVID-19 related demand was 220bp higher in 4QFY22 and Mar 2022, respectively, down from 290bp in 3QFY22. However, in March 2022 the excess demand for COVID-19 products was negligible,” Nomura’s report said.
The guidance provided so far by managements points to persistent pricing pressure, with average yearly price erosion in the high single digits, the firm noted, saying however, that it expects a moderation in price erosion, given inflationary pressures.
Likely disruptions in supply chains emanating from rising COVID cases in China, stability in competitive intensity and a rise in cost of capital are the other factors that could stem the erosion in pricing, Nomura said.
“We expect a q-q increase in sales for Sun Pharma, Dr Reddy’s and Cipla. Sun Pharma, demonstrating strong traction in the specialty segment. Cipla and Dr Reddy’s will likely benefit from new product launches,” the report said.
“We expect some disruption in sales to Russia/Ukraine/CIS region due to the Russia-Ukraine conflict that commenced towards end-Feb 2022. Dr Reddy’s is most exposed to the region in terms of contributions to revenues.”
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)