Chill pill

Pharma industry is expected to see mixed results

Pharmaceutical companies are expected to post mixed results with players catering to the domestic market benefiting more than generics exporters.

Not surprisingly, the BSE Healthcare Index has been among the worst-performing indices in the December quarter with a rise of just 1.17 per cent.

One reason for the underperformance is the poor show by the heavyweight Ranbaxy, which fell 26 per cent. On the other hand, most MNC stocks have done well.

Large generic exporters such as Ranbaxy will have to grapple with another quarter of a difficult operating environment in the US due to pricing pressures and difficulties in winning patent challenges.

This impact is expected to be partly offset by expanding export sales in emerging markets in CIS and Eastern Europe.

Also, generic players are likely to face higher operating costs owing to rising R&D costs and marketing and legal expenditure.

However, within the generic space, companies that have leveraged the partnership model, such as Dr Reddy's and Cipla, are expected to perform better.

For instance, in the case of Dr Reddy's, it is sharing R&D costs with venture capital companies, while Cipla has been working with its partners in overseas markets.

While Cipla's models limits aggressive profit expansion as it has to share profit with its overseas partner, it is also a low-risk model, as it avoids large marketing and allied costs abroad.

On the other hand, MNC players such as GlaxoSmithKline Pharma and Aventis with an overwhelming focus on the domestic market, are expected to benefit from a revival of sales in this market in the last quarter.

Domestic sales of medications have shown signs of reviving in the September quarter after almost a year. Indian players Cipla and Sun Pharma, which have expanded their presence in the domestic market, are also expected to leverage this upturn.

Meanwhile, Glaxo is expected to report an 18-20 per cent y-o-y growth in profit for the December quarter, while a 15-17 per cent growth is forecast for Aventis. In the case of Cipla, a growth of 30-32 per cent y-o-y is expected in the December quarter.

However, Ranbaxy, is expected to see profits fall by 30-35 per cent. With pharma stocks trading between 26 and 65 times trailing twelve-month earnings, any disappointment in quarterly results, is expected to result in sharp swings in stock prices.

Banking sector : changing fortunes

The banking sector has been the second worst-performer after metals in Q3FY06. In fact, they were the only two of the ten BSE sectors to have posted negative returns: the BSE Bankex declined 0.84 per cent whereas the Sensex gained 8.84 per cent. In CY05 too, the Bankex underperformed the index by about 25 per cent.

The December quarter is expected to be quite good for banks, both in terms of an improvement in assets as well as margins. On an average, banks are believed to have grown their loan book by about 30 per cent.

Interest rates in the quarter moved up by about 100 basis points though the rise in deposit rates has not been as high as that in lending rates.

Thus, spreads are likely to improve. Liquidity has been tight in the third quarter, which resulted in hardening of rates for papers with less than a year maturity.

For longer-term paper, interest rates are at about the same levels as in the previous quarter. Thus, there will not be much of an impact on banks' gilts portfolios.

Some banks, such as Bank of Baroda and Union Bank, could see better bottomlines with the base effect coming into play. Profits of these banks were adversely impacted in the previous corresponding quarter because they provided for higher depreciation after shifting securities to the held-till-maturity portfolio.

Thus, analysts believe that banks that have managed to grow their loan book should turn in strong numbers. Overall, bank results are expected to be reasonably good given the strong credit offtake both in the retail and corporate segments.