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Last Updated : Jun 14, 2018 12:54 PM IST | Source: Moneycontrol.com

3 pharmaceutical sweet spots that could return 13-34% in 1 year

Post-correction, pharmaceutical companies are now available at reasonable valuations making them attractive to long term investors

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Siddharth Sedani

All eyes were on the historic US-North Korea summit held in Singapore this week. It has been a wonderful 180 degree change from the nuclear tests being conducted and missiles flying over Japan just a few months ago to an agreement to maintain peace and stability. Markets love this.

Timely onset of the monsoon is a good sign for the upcoming Kharif season. It will be a key factor for GDP growth. We expect inflationary concerns to ease and strong rural demand to continue.

After the deceleration in March, factory output bounced back in April. Capital goods played a major role both in the dip and the subsequent recovery.

Coming to Indian markets, positive traction is lately being seen in the pharmaceutical sector. The sector has recently witnessed many clearances and approvals of plants which were earlier plagued by regulatory hurdles. New product approvals, launches and patents coming through have also renewed investor interest in the sector. Pharmaceutical companies have broadly corrected a lot from their all-time highs and are now available at reasonable valuations making them attractive to long term investors.

In the pharmaceutical sector the companies we like are:

Cadila Healthcare: Buy | CMP - Rs 394 | Target - Rs 489 | Return - 24%

The company expects 40-50 launches annually and is focusing on vaccines and biologics – which could be future growth drivers.

It has strong ANDA pipeline in the US, with 144 filings awaiting approval of which 60+ are Para IV.

It launched 20 products in the year, including g Lialda and gTamiflu and received 77 approvals in FY18, bringing cumulative filings/approvals to 330/186.

The company will launch high-margin key products such as gAsacol HD & gToprol in FY19.

The company has recently announced it is considering fund raising proposals of up to Rs.10,000 Cr via QIP & up to Rs. 5,000 cr via FCCBs.

We expect 11 percent and 17 percent CAGRs over FY18-20 in revenue & earnings respectively, our target price is based on 21x FY20e EPS.

Alkem Laboratories: Buy | CMP - Rs 2,008 | Target - Rs 2,266 | Return - 13%

We expect revenue and earnings to grow at a fast pace, driven by its focus on brand leadership in the acute segment, rising share of the chronic segment and a ramp-up in its US business.

The company is expanding domestic operations through product launches and moving into other therapies. We expect 16 percent revenue CAGR over FY18-20 in its domestic formulations.

Though a late entrant, Alkem has ramped up its US business and will continue to focus on R&D to accelerate ANDA filings for the US and develop a varied portfolio. So far, it has filed 107 ANDAs, of which 49 have been approved.

We maintain a Buy on the stock, with a target of 2,266, based on 22x FY20e EPS.

Jubilant Life Sciences: Buy | CMP - Rs 776  | Target - Rs 1,040 | Return - 34%

JLS fundamentals are robust as it has created a business model with high entry barriers.

In the pharmaceutical space, JLS has crafted a niche wherein it has built its presence in segments like nuclear medicine (radiopharma), contract manufacturing of sterile injectables and allergy immunotherapy which have high entry barriers on account of manufacturing complexity. Also being backward integrated for most solid dosage filings in the US, the same is sustainable and attractive too.

At the current juncture, JLS is in a sweet spot, where most of its businesses are supported by favourable market conditions. The life sciences ingredient business is moving positively by virtue of a strong demand environment. Likewise, the radiopharma business is also on a growth trajectory by virtue of long-term supply contracts it has finalised with wholesalers in the US market and recent launch of Ruby–Fill in the US.

JLS has planned to invest about Rs 550 crore in capital expenditure in FY19. In addition, JLS plan to invest Rs 300 crore in R&D during the year, including Rs 150 crore in Product Development expenditure.

We maintain a Buy on the stock, with a target of 1040, based on 11.7x FY20e EPS.

Disclaimer: The author is Head & Vice President - Equity Advisory at Anand Rathi Shares and Stock Brokers. The views and investment tips expressed by investment experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Jun 14, 2018 12:54 pm
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