3QFY18 Results Preview

Post the bumper domestic sector numbers in 2QFY18 which provided a temporary boost to the pharma pack, we believe that 3QFY18E is likely to be more of a mixed bag. Companies with limited competition launches in the US such as CDH, CIPLA, ARBP and STR are likely to report strong numbers in 3QFY18E. Domestic focused companies like ALKEM and TRP are likely to benefit to some extent from the low base of 3QFY17 which was impacted by demonetisation and the trailing effects of channel re-stocking. However, sequential growth looks difficult. Overall, we see 1.4% YoY growth for our coverage universe and the EBITDA margin to remain steady sequentially at 21.9% in 3QFY18E.

Laggards:Companies like SUNP, DRRD, LPC, GNP and ALPM, while having strong domestic presences will struggle to show growth in 3QFY18E due to the absence of significant launches in the US market. Current regulatory issues for SUNP (Halol WL), LPC (Goa and Indore WL), DRRD (Duvvada WL) and GNP (Baddi 483s) have stifled launches in the US market in the recent past and we expect this to reflect in the current quarter's US numbers. LPC and GNP will also suffer from high bases in3QFY17 where there were significant sales of limited competition products.

Differentiated/diversified business models to prosper:We believe that pharma companies having differentiated business models like CRAMs (DIVI and DCAL) or highly diversified business mixes (GRAN, JUBILANT and STR) are likely to report good numbers in 3QFY18E due to the absence of the current pressures of being a front-end player in the US market. We expect (1) tailwinds in JUBILANT's chemicals business, (2) scale up in Australia plus a couple of significant launches in the US for STR, (3) impact of core capacity expansion for GRAN and (4) a full commercial quarter for Niraparib for DCAL to drive strong performances for these companies.

Top picks: CDH, LPC, ALKEM, DISH and GRAN