Just what the doctor ordered

Fast-growing European generics market and rising domestic sales perk up pharma numbers

Large generic players such as Ranbaxy, Dr Reddy's and Cipla are expected to report an improvement in sales and net profit on a y-o-y basis for the September 2006 quarter, despite rising input costs and the well-documented pricing pressure in the US generics markets.

As a result, the BSE Healthcare index has moved in line with the broader market over the past three months "" this sectoral index has gained 15 per cent over the past three months, similar to the gain in the Sensex.

Domestic pharmaceutical companies have recently taken over several European generic players and the synergies derived from these acquisitions should help them expand sales in the fast growing European generics market.

In addition, sales in the domestic market are expected to have been strong in the last quarter. For Ranbaxy, analysts are expecting the company to grow its sales by 18- 22 per cent y-o-y in the September 2006 quarter, helped by the acquisition of Romania-based Terapia, coupled with its 80 mg simvastatin tablet, which has enjoyed a 180-day exclusivity.

The company's net profits are expected to grow a staggering 700 per cent on a y-o-y basis in the last quarter, given the low base effect in the previous year.

Other generic players such as Dr Reddy's are expected to see net sales improve by 120-125 per cent y-o-y in the September 2006 quarter, thanks to the recent acquisition of Germany-based betapharm. Its net profits, however, are expected to grow by 60-70 per cent on a y-o-y basis in the last quarter.

Cipla, which has a low-risk partnership model in overseas markets, is expected to see its net profit growth by 35-40 per cent in the last quarter, on a 20-22 per cent growth in net sales.

Meanwhile, multinational players such as GlaxoSmithkline Pharmaceuticals are expected to see their net sales improve by 6-10 per cent in the last quarter, broadly in line with the growth in the domestic market. Glaxo's net profit (excluding exceptional items) is expected to improve by 8-10 per cent in the September 2006 quarter, say analysts.

The stock market seems to be valuing the improved performance, especially for the domestic pharma companies, with Cipla trading at 28 times estimated FY07 earnings. Ranbaxy gets a discounting of 33 times estimated CY06 earnings, while Dr Reddy's trades at about 24 times.

Engineering growth

With no signs of weakness in the well-documented boom in the capex cycle, analysts expect the capital goods sector to see another buoyant quarter in September 2006.

Also, earnings momentum for players such as ABB and BHEL will improve as many of the orders that these companies have bagged a few quarters ago will be implemented.

The street appears to have factored in the growth opportunities in the sector, with the BSE Capital Goods index rising 19.5 per cent over the past three months as compared to a 16 per cent gain in the Sensex.

Equipment suppliers to the power sector such as BHEL had bagged several orders in Q2 FY07, which include a 500 mw thermal power plant in Madhya Pradesh for Rs 1,224 crore.

Also, the company is expected to leverage its earlier agreement with Alstom, France, and its resulting ability to build 800-1000 MW generating units, in the last quarter.

BHEL is expected to see its operating profit expand by 60 per cent y-o-y in the September 2006 quarter compared with 40 per cent growth in net sales, believe analysts.

Strong growth opportunities for power equipment is also expected to help ABB grow its operating profit by about 40 per cent in the September 2006 quarter, as compared to a 35 per cent growth in net sales.

Steel prices, a key input for companies in this sector, were up 8-10 per cent y-o-y in the last quarter. Other raw material costs too have gone up.

However, several CEOs of capital goods companies have repeatedly pointed out at analysts meets, that their contracts contain a clause which allows them to pass on higher input costs, like steel and non-ferrous metals.

Engineering company L&T too is expected to see its operating profit grow by 85-90 per cent y-o-y in Q2 FY07, with a net sales growth of 20 per cent. Stocks in this sector trade between 25 and 40 times estimated forward earnings, given that the growth opportunities remain strong over the medium term.