Outstanding amid pandemic
The pandemic-led disruption has taken a toll on the business and financials of almost all companies, large or small, and across industries. This could be gauged from the sample data of over 2,100 companies which showed a 6 per cent fall in net sales/revenue. Their combined profit before tax plunged 85.5 per cent year-on-year (YOY) and net profit slipped 88 per cent in the March 2020 quarter.
Amid this gloom, there are a few companies that stand out. Of the 600-plus companies, which are tracked by brokerages and for which the Bloomberg data for future earnings estimates is available, around 40 have seen an upgrade in their earnings since the start of the financial year (FY21) — a sign of improvement in the business outlook. Here are 15 such companies, many of which have also reported an increase in revenue and/or profit before tax for the March quarter.
AARTI DRUGS Price (₹) 1,489 PE FY21E (x) 21.6
The company’s gross margins expanded 704 basis points to 37 per cent in the March quarter (Q4) on improved realisations as prices of key active pharmaceutical ingredients (APIS) rose 10-15 per cent. Cost rationalisation also aided profit margin. Net profit doubled on improved operational performance and a lower tax rate. The company, which gets nearly 90 per cent from APIS, should benefit given the disruption in Chinese supplies and efforts to indigenise manufacturing of raw material.
ALEMBIC PHARMACEUTICALS Price (₹) 977 PE FY21E (x) 23.8
The company witnessed the highest earnings upgrades in the pharma sector, led by a betterthan-expected March quarter performance in both domestic and US markets. The company is expected to outperform in the US market, led by 20 new drug launches in FY21, a strong regulatory track record and healthy investments in research and development. Double-digit growth in key markets and the completion of the capex cycle (FY16-21) later this year will boost free cash flows.
BRITANNIA Price (₹) 3,785 PE FY21E (x) 54.7
The bread-to-biscuits maker is well-placed to gain from the strong traction in in-house food consumption amid the Covid-led disruption. Given that health and hygiene are currently consumers’ priority, demand for products from trusted and quality players like Britannia should remain robust. This will be supported by its strong distribution network of 2.2 million direct outlets and a vast product portfolio. Strong June quarter, benign input costs, lower competition, cost efficiency, and a better product mix further improves earnings outlook.
CADILA HEALTHCARE Price (₹) 377 PE FY21E (x) 23.6
The growth trajectory in the domestic and US markets remains intact despite the lockdown. Domestic supplies and export of hydroxychloroquine (HCQ) for Covid-19 treatment, coupled with last year's low base and the currency movement, will drive growth. Cadila is also launching another Covid-19 treatment drug, remdesivir, and is working on a vaccine, trials for which are underway. Further benefits will accrue from its changed focus in India and a vast portfolio. A strong US pipeline (90 pending approvals for drug launches) will help sustain the momentum, and so will its fast-growing consumer products exposure.
CHAMBAL FERTILISERS Price (₹) 153 PE FY21E (x) 5.8
Chambal Fertilisers is benefiting from strong demand and is insulated from the lockdown, being an essential commodities producer. While strong rabi crop has boosted farm incomes, a normal monsoon has improved prospects of kharif crop, leading to a better sowing acreage. A leading urea player, the company is also gradually gaining market share in the non-urea segment, which should support earnings on FY20'S high base (when profits doubled). Sustained performance of its efficient Gadepan III unit will help margins. All this has led analysts to upgrade its earnings.
COROMANDEL INTERNATIONAL Price (₹) 777.0 PE FY21E (x) 19.5
Coromandel International is another beneficiary of strong demand for agri inputs on the back of good monsoon and better sowing acreage. While improved plant utilisation is driving the fertiliser segment's profitability, debottlenecking of capacities will drive earnings going ahead. Cheaper raw materials and the backward integration of phosphoric acid capacity will improve margins of nutrient-based fertilisers. The pick-up in demand for crop protection solutions, aided by new products, also bodes well. With improved profitability profile, the company has received significant earnings upgrades.
DHANUKA AGRITECH Price (₹) 814 PE FY21E (x) 22.2
A 39 per cent growth in operating profit led by sales growth, easing raw material prices and cost control measures was the near-term trigger. Healthy demand for herbicides is a positive given its 31 per cent contribution to Dhanuka's revenues. Further, traction in North and South markets, normal monsoons and new product launches should aid the topline. This coupled with improving product mix and lower costs are expected to keep the margin profile and outlook strong.
DR REDDY’S LABS Price (₹) 4,119 PE FY21E (x) 27.0
Dr Reddy's remains well placed to grow profitably in the world's largest market, the US, led by its changed strategy of concentrating on limited competition products. While cost controls and high-margin injectables are earnings drivers, the company is developing specialty drugs and biologics to drive growth further. With the resolution of US FDA issues related to its Srikakulam active ingredients plant, most regulatory concerns are behind. Dr Reddy's is also focusing on India and other emerging markets, as well as China, to push growth. Analysts, thus, expect its earnings to grow 20 per cent annually during FY20-22.
JUBILANT LIFE SCIENCES Price (₹) 679 PE FY21E (x) 10.9
Prospects for the company’s pharmaceuticals, life science ingredients (LSI), and drug discovery & development solutions businesses remain strong. The specialty products, such as radio diagnostics, in the US will continue driving the growth of pharmaceutical services. Likewise, Vitamin B and other nutrients is driving LSI'S growth as demand for specialty chemicals from crop protection and other industries is improving after the disruption in April. Newer segments like drug discovery & development are growing fast, led by increased opportunities and capacities. Plans to de-merge the pharmaceutical and LSI segments should unlock value for investors.
LAURUS LABS Price (₹) 642 PE FY21E (x) 21.1
Led by growth in the formulations and synthesis business, the company reported a surge in operating profit growth (58 per cent), margin improvement (400 basis points), and doubling of net profit in FY20. Analysts expect the momentum to sustain, given the mix of anti-retroviral drugs, which was impacted by pricing pressures earlier, has come down, improving the predictability of revenues. This, coupled with a strong order book in formulations and approvals of active pharmaceutical ingredients, should aid growth this year.
P&G HYGIENE Price (₹) 10,487 PE FY21E (x) 65.8
A resilient portfolio with a strong position in the hygiene and health-care segments bodes well in terms of a faster recovery in sales. The feminine hygiene (Whisper) accounts for around 70 per cent of Procter & Gamble Hygiene & Health Care's overall revenue, and is more profitable. The overall recovery is being supported by the expansion of the distribution network, undertaken by the company. Likely normalisation of advertising spends, after increasing in the last couple of years, and sturdy gross margin will drive earnings.
SANOFI INDIA Price (₹) 7,762 PE FY21E (x) 34.2
Growth for this India arm of France-based Sanofi is being driven by multiple factors. Its wellestablished branded drugs portfolio in diabetes management (Lantus, Amaryl M), pain relief (Combiflam) and anti-allergic (Allegra), along with extensions of these power brands, is driving the company's prospects. The diabetes market, for instance, remains under-penetrated and could lead to exponential growth. Even products, which had come under price control, have been growing in terms of volumes and benefited from price hikes in line with wholesale price inflation.
SHARDA CROPCHEM Price (₹) 268 PE FY21E (x) 12.8
The reversal of the falling margin cycle is the key trigger for earnings upgrades. Margins, which have been under pressure over the last five years, are expected to improve by 200-300 basis points over the next two years. This is likely to be led by lower raw material costs, new product registrations in key markets, and the easing of working capital issues, which had hampered growth last year. Good prospects in the US and the European Union, coupled with market share gains should drive revenue growth going ahead.
SUMITOMO CHEMICAL Price (₹) 264 PE FY21E (x) 45.6
A strong operating performance in the March quarter on the back of margin expansion, integration benefits and a better outlook for the domestic agrochemical business has led to the upgrades. Profitability is expected to increase further on the back of higher contribution from specialty portfolio, lower raw material expenses and cost optimisation benefits. Its growth momentum is expected to continue in FY21 on the back of new launches, a rich pipeline of products from its multinational parent and cross-selling opportunities.
TATA COMMUNICATIONS Price (₹) 699 PE FY21E (x) 36.4
Expectations of strong order wins, new leadership, and a rapid increase in digital adoption have been the key triggers for the company, which saw the March quarter profit being impacted by exceptional items. Higher communication, collaboration, and cloud-based demand should drive products and solutions of Tata Communications. Analysts at CLSA say growth and the innovation service segments will help the company double its net profit over the next couple of years. Its target to reduce net debt over the next three years and achieve return ratios over 20 per cent are the stock triggers.