Will Q4 earnings herald pharma sector's emergence as new market leader?

It is almost certain that the March quarter numbers of India Inc will disappoint because of the prolonged economic slowdown worsened by the coronavirus outbreak.

However, pharma is one sector that may buck the trend, if not in numbers, then on the road ahead. Pharma's future looks brighter in comparison to other sectors, say experts.

As the numbers have started coming in, investors are closely watching the outlook on the road ahead for all the sectors.

The unprecedented disruption caused by the pandemic may have a longer-than-expected impact on the economy and change the leadership in the stock market, experts say.

Sanjiv Bhasin, Director at IIFL Securities, said the market would see a change in sectoral leadership after the COVID-19 and the leaders of now may not be in the same position in the future.

"OTT and data is the next game plan. There will be a lot of new changes which will come about. There will be a change in market leadership also. New leaders may not be from NBFCs but from some other sectors such as pharma," he said.

Vikas Jain, Senior Research Analyst, Reliance Securities, is of the view that private banks, pharma and insurance sectors would dominate the markets in the coming years as valuations were reasonable and market share gains in domestic and international markets would incrementally add to earnings, expanding the PE multiples going forward.

"Our FY21 earnings estimates for our coverage universe are unlikely to change materially as will be FY22 estimates as there is no change in visibility aspect," said ICICI Direct.

However, the brokerage expects a multiple re-rating in some stocks, especially for those with stable earnings visibility, no balance sheet stress and strong return ratios, having strong presence in some critical segments and decent ESG (environmental, social and governance) quotient.

"Owing to improvement in product mix and efficient cost control measures, EBITDA of our healthcare universe is expected to grow 11 percent YoY to Rs 35,034 crore. EBITDA margins are likely to improve 81 bps to nearly 20 percent," said ICICI Direct.

ICICI Direct expects adjusted net profit to grow 9 percent YoY to Rs 3,645 crore, mainly in line with operational performance.

BOB Capital Markets, a wholly-owned subsidiary of Bank of Baroda, expects Dr Reddy's Labs, Lupin and Divi's Labs to report a good quarter, with higher margins quarter-on-quarter (QoQ) for Lupin and Divi's Labs.

BoB Capital expects US sales to rise 7-13 percent QoQ for Dr Reddy’s Labs and Lupin and remain stable for Aurobindo Pharma and Sun Pharma and fall 7 percent for Cipla.

"Q4 is seasonally soft for India sales. We expect 10 percent YoY growth. The Covid-19 impact across markets could reflect from Q1FY21. Laurus should see its best-ever quarter," said BoB Capital.

Kotak Institutional Equities expects the domestic formulations segment to see a healthy quarter with 9-12 percent YoY organic growth, with a limited impact of COVID-19 on domestic sales for, given most companies have a cut-off date of around March 20 for booking sales.

"We expect US revenues for Sun, Lupin and Aurobindo to increase sequentially by $5-10 million, led by new launches on a largely stable base. Dr Reddy's US base will likely recover to $235 million led by new launches. We expect Cipla to see a $7 million decline in US sales on account of further erosion in key products," Kotak said.

Kotak believes Q4 is a seasonally strong quarter, but companies will be impacted by the lockdown in March. Hospitals will see an additional impact due to a sharp decline in their international patient business led by travel restrictions.

Besides, the balance sheet of many pharma players is stretched, which remains a concern for investors.

"In this bear market, a lot of money has shifted to pharma and consumer staples. Fundamentally, the balance sheet of many companies in the pharma sector is still stretched. I would wait for Q4 and Q1 numbers to see if fundamental bottom in this sector is placed or not," said Sameer Kalra, Founder, Target Investing.