Export data trends: Challenging times ahead for Divi’s, Gland, Laurus and Ipca

13 Jan 2023 , 11:31 AM

JB Pharma’s Export shipment run-rate has sustained in Q3 as well, likely implying 20% YoY growth in its export sales during the quarter. While Divi’s and Laurus’ sequential decline in exports was driven by virtually nil shipments for high-margin COVID products (Molnupiravir and Paxlovid) which will pressurize their overall margins and earnings profile in Q3, the muted performance for Gland and Ipca was driven by large base business products such as Enoxaparin and Losartan. 

With sustained weakness in the exports business, analysts at IIFL Capital Services have downgraded their FY23-25 EPS estimates for Gland by 9-11%, Divi’s by 3-4% and Ipca by 3-5%. Consensus estimates for Divi’s, Gland, Laurus and Ipca are still optimistic; analysts at IIFL Capital Services expect the earnings downgrade cycle to continue for these companies. Their FY24-25 EPS estimates for Gland, Divi’s and Ipca are 12-18% below consensus. They maintain reduce rating on Divi’s (Top-Sell, Target Price Rs2,900) and downgrade Gland to Reduce (Target Price Rs1,400). India business performance for JB Pharma (Buy, Target Price Rs2,300) and Ipca (Add, Target Price Rs840) remains robust.

 

Divi’s – Molnupiravir QoQ decline will impact Q3FY23 margins; IIFL Capital Services’ FY24-25 EPS estimate is 15-17% below consensus and Divi’s is their top-Sell idea for 2023

Divi’s Q3FY23 will be the first representative quarter of virtually no Molnupiravir sales, as Molnupiravir shipments declined QoQ from USD37mn to USD2mn in Q3. Hence, the company’s EBITDA margins would continue to remain under pressure, after having moderated from ~44% in H2FY22 (peak of Molnupiravir sales) to ~33.5% in Q2FY23. Analysts at IIFL Capital Services estimate that Molnupiravir accounted for 25-30% of Divi’s earnings in H1FY23 and its contribution will decline to <5% in the coming quarters, thereby pressurizing the company’s overall earnings profile.

Divi’s base business export trends also remain weak and below IIFL Capital Services’ expectations, as the company’s base business Export shipments (ex-Molnupiravir) increased only 11% sequentially in Q3FY23 (on a depressed base of Q2FY23) versus IIFL Capital Services’ earlier estimate of 18% QoQ growth for the base business. Although the QoQ recovery in Divi’s base business was driven by CS products such as Sitagliptin & Raltegravir and generic products such as Losartan, Gabapentin & Dextromethorphan, improvement in these products would entirely be offset by the significant QoQ decline in Molnupiravir.

Divi’s overall export shipments declined 9% QoQ in Q3FY23 led by Molnupiravir versus IIFL Capital Services’ earlier expectation of 6% sequential revenue growth. Hence, analysts at IIFL Capital Services have downgraded both their topline and margin assumptions for the company, thereby leading to ~3-4% EPS cuts for FY23-25. In their revised estimates, analysts at IIFL Capital Services have already factored-in ~16% CAGR in Divi’s ex-Molnupiravir revenue over FY23-25 and have assumed overall EBITDA margins to improve from ~33.5% to ~37% by FY25.

 

Gland – Massive decline in Enoxaparin will lead to a very weak Q3FY23; IIFL Capital Services’ FY24/25 EPS estimate is 18% below consensus and they have downgraded the stock to Reduce from Add

Gland’s overall export shipments declined 16% QoQ from USD95mn in Q2FY23 to USD80mn in Q3FY23 versus IIFL Capital Services’ earlier estimates, where IIFL Capital Services had factored-in 6% cc QoQ revenue growth for the company’s exports business. Sequential decline in Gland’s Export shipments was primarily driven by Enoxaparin which declined QoQ from USD30mn to USD13mn and ~80% of Enoxaparin’s QoQ decline was led by the US market. While Heparin saw good recovery and Micafungin shipments also improved to USD4.5mn quarterly run rate, the QoQ decline in Enoxaparin was too steep for the company to contend with. Decline in Enoxaparin is surprising given that Gland had won incremental contracts for the product and this likely implies that Enoxaparin might have also benefitted from one-off demand during the COVID period.

Apart from sequential decline in Export shipments, Gland’s geographic mix was also inferior as the US market accounted for only ~68% of Gland’s overall Export shipments in Q3FY23 versus ~73% in Q1FY23; lower US revenue share will also impact company’s Gross/EBITDA margins in Q3FY23.

Owing to sustained weakness in the Exports business, higher competitive intensity in the US injectables market from smaller Indian pharma players, and limited visibility on near-term growth, analysts at IIFL Capital Services downgrade Gland’s FY23-25 estimated EPS by 9-11% led by lower topline and margins. Their revised FY23-25 EPS estimates are 16-18% below consensus estimates, thereby implying that the earnings downgrade cycle for Gland is likely to continue. Although Gland’s valuations at ~21/18x on IIFL Capital Services’ FY24/25 estimated EPS looks reasonable now, analysts at IIFL Capital Services believe the stock will continue to consolidate over the next 3-4 quarters till visibility on medium-term growth improves. 

Laurus – Paxlovid decline will present very tough QoQ comparables

Laurus’ Paxlovid intermediate shipments were only USD3mn in Q3FY23 (3% of overall Export shipments) versus USD70mn in Q2FY23 (50% of overall Export shipments) which will present very tough QoQ comparables for the company. Analysts at IIFL Capital Services estimate that Paxlovid contributed revenue of USD130mn to Laurus in H1FY23 and accounted for ~45/60% of Laurus’ overall EBITDA/EPS in H1FY23.

With Paxlovid’s shipments declining materially during the quarter, Laurus’ EBITDA margins and earnings will be under pressure in Q3FY23. Laurus’ base business Export shipments (ex-Paxlovid) improved from a quarterly run-rate of USD70mn in H1FY23 to USD94mn in Q3FY23, with sequential recovery in the base business being driven by DTG/Lamivudine combinations, Cyclohexyloxy, Ethylene Dione and Chlorophenylphenylmethyl.

 

Ipca – Export shipments declined 10% QoQ / 5% YoY in Q3FY23; IIFL Capital Services’ FY23-25 EPS estimate is 12-14% below consensus

Ipca’s weakness in the Exports business continues, with the company’s Export shipments declining 10% QoQ to USD75mn in Q3FY23 versus USD83mn in Q2FY23. The sequential decline in shipments was primarily driven by 25-50% QoQ moderation in products such as Losartan, Furosemide, Allopurinol, HCQS and Metformin. Analysts at IIFL Capital Services were earlier building in 4-4.5% cc QoQ growth in Ipca’s Exports business for Q3FY23 versus 10% QoQ decline being shown by the Exports data.

With sustained weakness in the Exports/API business (notwithstanding Ipca’s consistent ~12-13% growth in its domestic India business), analysts at IIFL Capital Services downgrade their FY23-25 EPS estimate for Ipca by 3-5%. They continue to see downside risks to Ipca’s consensus margin expectations of 400-450bps improvement in FY24/25 (versus H1FY23), particularly given Ipca’s muted growth in Exports business, incremental costs from ~20-25% recent field force expansion in India, and increase in API import costs from China. 

JB Pharma – Export shipment run-rate has sustained in Q3FY23, likely implying ~20% YoY growth (in line with IIFL Capital Services’ estimates)

After delivering ~20% cc YoY growth in its Export sales in H1FY23, JB Pharma’s Export shipment run-rate has sustained in Q3FY23 as well, with Export shipments of USD37mn in Q3FY23 (flat QoQ and up 20% YoY). Although JB’s lozenges shipments to CMO customers moderated marginally from USD10mn in Q2FY23 to USD9mn in Q3FY23 (better than ~23% QoQ decline in CMO revenue factored-in IIFL Capital Services’ estimates), the company has still been able to largely maintain its overall export shipment run-rate.

While JB’s Exports are tracking in line with IIFL Capital Services’ Q3 expectations, JB’s secondary sales growth in the domestic India pharma market was ~25% in Q3 (per industry data) versus ~14% India business growth which analysts at IIFL Capital Services have currently factored-in their estimates, thereby providing an upside risk to their estimates.