Companies & Sectors
Pharma company earnings: Slowdown in the domestic formulation; exports solid

Except for Cipla and Glaxo which are impacted more by the slowdown in the domestic market, analysts expect an improvement in sales and EBITDA quarter-on-quarter for other pharma companies in the industry, says Nomura in its research note

The growth in the India pharmaceutical market is adversely impacted by trade

destocking. Though Dr Reddy’s has benefitted from a lower base in the previous quarter (the increase in sales towards the end of Q1FY14 due to the resolution of agitation by chemists in Maharashtra was accounted for fully in Q1FY14 numbers), the ongoing tussle between the trade and pharmaceutical companies regarding trade margins is likely to impact the growth adversely, according to Nomura Equity Research in its note on the pharmaceutical industry performance. Analysts accordingly factor in -3% growth in the industry. There is also a drop in prices as per the new pricing policy.


The key characteristics of the quarterly performance of the pharmaceutical industry are: a) a slowdown in the domestic formulation business due to the implementation of the new pricing policy and tussle with the trade on margins; b) key high value launches in the quarter, particularly by Dr Reddy’s and Sun Pharma; and c) rupee depreciation against key export currencies, points out the Nomura research note.


Except for Cipla and Glaxo which are impacted more by the slowdown in the domestic market, Nomura analysts expect an improvement in sales and EBITDA quarter-on-quarter for other pharma companies.


Nomura analysts expect the industry to record a consolidated revenue growth of 14.4% and EBITDA growth of 15.5% in 2QFY14F.


In its overall analysis of all companies in the sector, the research note says that medium-term growth drivers that include the US and India opportunities are intact for the sector. Further, rupee depreciation presents additional tailwind, concludes Nomura.


The Nomura research note estimates for the sector are given in the table below:


Sales of Indian companies are slowing down

Weakening real activity has meant that top-line growth has been in freefall, dragging down profits along with it, says Nomura Equity Research in its research note on September quarter earnings preview

Net sales of Indian companies have been growing at an ever-slower pace over the past three years due to external considerations like inflation, depreciating rupee etc., according to a research note on September quarter earnings preview by Nomura Financial Advisory and Securities. This observation is clearly shown in the graphs below:



With topline growth falling, the bottomline has been under pressure in most companies. Nomura sums it up with the remark, “Weakening real activity has meant that top-line growth has been in freefall, dragging down profits along with it.” This observation is shown in the graphs below:


Sectors with high operating and financial leverage have to live with increasing pressure on operating and net profit margins, warns Nomura in its India Equity Strategy note. Industries facing domestic economy continue to remain a drag and are expected to make negative contributions to aggregate profit growth in the quarter.


The bright side of the problem has been that while competition has put margins under pressure, significant relief from weak raw material prices has been an important offsetting factor in protecting sequential downside to gross margins; Nomura notes that despite being in freefall, net sales growth has exceeded cost of goods sold growth over the past five quarters.


Even though recovery is expected soon, there is a warning that it may not benefit all investors in the stock market. Recovery is not broad-based - a large part of the year-on-year growth in market aggregates is on account of a handful of exporting sectors, beneficiaries of a depreciating rupee and the nascent global economic recovery. More specifically, excluding non-PSU oil & gas, autos (led by JLR), IT services and pharma from aggregate numbers: net sales growth falls from 14.1% to 8.6%; operating profit growth falls moderately from 15.5% to 13.3%. Net profit growth falls from 9.4% to no growth, points out Nomura.


Sector-wise performance and forecast is shown in the graph below:



The research note concludes that as the market recalibrates its expectations of a rate cutting cycle in the face of improving current account deficit numbers and the potential delay of the Fed taper (in light of the negative implications of the current fiscal impasse in the US0, valuation does not offer much comfort. The 12-month forward consensus-based earnings multiple for the market is currently at 13.2x (versus a five-year average of 14.3x) is not encouraging given the negative outlook on growth, with possible exception of upside from export growth.


The percentage change in corporate earnings for Sensex companies during the last quarter is shown below:



‘America Is Not Stupid’ wins IRS recognition as tax-exempt non-profit

US tax regulators recognize two related dark money groups, even though they appear to have made misleading statements on their applications for tax-exempt status

The IRS has granted nonprofit status to America Is Not Stupid – a so-called dark money group best known for a 2012 election ad featuring a talking baby who compared the smell of his diaper with a Montana senator.

As ProPublica wrote in January, America Is Not Stupid and a related group, A Better America Now, applied for IRS recognition in the run-up to the 2012 election, swearing under penalty of perjury that they would not spend money on elections.

Then both groups went ahead and did exactly that, spending more than $125,000 on mailers and ads opposing Democratic candidates in Texas and Montana.

Despite these disclosures, records show, the IRS gave A Better America Now its stamp of approval as a social welfare nonprofit in April and recognized America Is Not Stupid in late June, decisions that elicited amazement among campaign finance watchdogs.

Marcus Owens, a nonprofit lawyer who ran the IRS Exempt Organizations division from 1990 to 2000, questioned whether a controversy that erupted earlier this year, over the agency subjecting certain conservative nonprofits to extra review, had damaged its ability to fulfill its regulatory functions.

“The oversight has collapsed,” Owens said. “The current people in Exempt Organizations have no tax law enforcement experience and no exempt organization experience in particular. And they’ve been charged with making this particular headache go away.”

Because of the government shutdown, the IRS could not be reached for comment. In the past, the IRS has not commented on stories about specific groups. Talking about individual taxpayers violates the law.

No one from either America Is Not Stupid or A Better America Now responded to emails and phone calls asking for comment.

In May, the IRS admitted that it had flagged the applications of Tea Party and related groups for extra review, dooming many to years of limbo. That admission turned into a firestorm, leading to the immediate resignation of the acting IRS commissioner and the eventual replacement of the top officials in the Exempt Organizations division. Senate and House committees started investigating. The Treasury Inspector General for Tax Administration expanded its initial audit. And the Justice Department announced a criminal inquiry. (Later, records were released showing that the IRS was also flagging liberal groups with “progressive” in their names.)

Since the Supreme Court’s Citizens United ruling in early 2010 opened the door to increased political spending by corporations and unions, nonprofits like America Is Not Stupid have taken on an expanding role in U.S. elections. That’s largely because they do not have to identify their donors, unlike super PACS, leading them to be dubbed “dark money” groups.

About 150 of these nonprofits spent more than $254 million in 2012 on ads, phone calls and mailings reported to the Federal Election Commission. Almost all the donors of that money have remained anonymous. Most of that money — more than 85 percent — was spent by conservative groups, according to the Center for Responsive Politics and research by ProPublica.

These groups are allowed to spend limited amounts to influence elections, as long as they can prove their primary purpose is “social welfare.” But ProPublica has shown how dozens of social welfare nonprofits have underreported their political spending, or spent money on elections despite telling the IRS they would not do so.

In its 2012 annual work plan, the IRS recognized the problem, announcing it would take a hard look at nonprofits and “serious allegations of impermissible political intervention.”

If the agency’s exchanges with America Is Not Stupid and A Better America Now are any indication, however, the augmented focus on nonprofits has been less than ferocious.

The IRS sent ProPublica the groups’ applications for recognition last November, even though they had not yet been recognized and the documents were therefore not supposed to be made public. We wrote stories about these and several other pending applications, bringing it to the IRS’ attention that these groups had pledged that they would not spend money on elections, yet did so.

According to IRS records, neither group ever amended its application to reflect its political spending.

In response to IRS questions about their applications, though, the groups acknowledged that they had spent small amounts on elections – a contradiction that apparently did not hobble their chances for recognition.

A month after receiving IRS recognition in April of this year, A Better America Now changed its story again. It filed its 2012 tax return and asserted – again, under penalty of perjury -- that it had spent no money to influence elections. ProPublica reported this in July.

The group’s president, Bob Portrie, lawyer Eugene Peek, and accounting firm LBA Group, all out of Florida, did not return calls and emails for comment.

The IRS told ProPublica that the 2012 tax return for America Is Not Stupid was unavailable as of last month. Renae Duncan, the group’s certified public accountant in Texas, said she would pass on an inquiry from ProPublica to Miguel A. Gutierrez, the group’s president, on Monday morning. He has not yet responded.

In replying this May to IRS questions on America Is Not Stupid’s application, Gutierrez provided several examples of the group’s activities as proof that it had a bona fide social welfare mission of improving the good of a community — the critical factor in maintaining tax-exempt status.

He said the group had created a website,, and had authored articles “regarding how underserved communities or minority populations and economically disadvantaged small businesses may be affected by certain U.S. federal rules and regulations in the coming years.” There’s no sign of any such articles on the website or elsewhere, however. (On Monday, one of the website’s top stories was on “CoralActives: Breakthrough Acne Skin Care.”)

To showcase the group’s “educational content,” Gutierrez pointed to the main website for America Is Not Stupid, a single page with 156 words on it.

He told the IRS that the nonprofit conducted polls in Montana, Nevada and Texas, targeting heads of households with Hispanic surnames. But the only poll included in the response didn’t mention Latinos at all. Instead, it asked Montanans about which candidates they planned to vote for in the 2012 election.

The group’s president also said the group held events, including one in San Antonio to “openly discuss topics affecting the Hispanic population in the U.S., including, but not limited to, healthcare, the housing market, jobs and the economy, and various education issues.”

Gutierrez said the event was held on Oct. 26 — just before the 2012 election. The event was free for the first 3,000 people, and billed to the public as strictly entertainment, an evening featuring comedian Paul Rodriguez and the Leslie Lugo Band playing music “to dance into the night.”

But former Bush official Hector Barreto gave the keynote address, Gutierrez told the IRS. One detail America Is Not Stupid didn’t mention: Barreto also happened to be the co-chair of Juntos Con Romney, Republican presidential candidate Mitt Romney’s Hispanic steering committee.

Nothing Gutierrez said in his May 24 response to the IRS seems to have raised any red flags with the IRS, however.

A month after receiving it, the IRS recognized America Is Not Stupid.



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