Budget 2021 | Focus on healthcare but mixed bag for pharma, 9 stocks you can pick from sector

This funding would be used to develop capacities of the healthcare system, institutions for detection and cure of new and emerging diseases.

Increased allocation to the healthcare sector is positive but as most allocations are intended towards drinking water, sanitation and COVID-19 vaccine, the pharma stocks do not have too much to cheer about.

What experts say

Siddharth Sedani, Vice President- Equity Advisory, Anand Rathi Shares and Stock Brokers, said after a spell of underperformance since 2017-2020, the outbreak of COVID-19 pandemic has brought the pharma sector to the forefront.

"We are still positive on the sector on the back of Atmanirbhar India and being self-reliant on pharmaceuticals and API segment. The world is looking at other countries other than China to become global supply channels where India fits the bill," said Sedani.

Likhita Chepa, Senior Research Analyst, CapitalVia Global Research, said stocks of vaccine manufacturers stocks, active pharmaceutical ingredient (API and those of hospital or equipment-maker are likely to perform after the Budget announcements.

Vishal Manchanda, a research analyst at Nirmal Bang Institutional Equities, said higher spend on COVID-19 vaccination will benefit listed players like Dr. Reddy, which should be rolling out a vaccine (Sputnik V) by early FY22.

In another announcement, the government proposes to provide the pneumococcal vaccine to the Indian population as part of the universal immunisation program. This will benefit Aurobindo Pharma, which is expecting to roll out a pneumococcal vaccine by end of FY22, Manchanda said.

He, however, said that the increased spending towards water and sanitation may not have an impact on pharma players directly but potentially lead to curtailment of incidence of acute or infectious disease in the general population, leading to slower growth in the acute segment of the Indian pharma market.

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities, is of the view that the PM Atmanirbhar Swasth Bharat Yojana will benefit hospitals and diagnostics labs who could potentially partner with the government to operate/manage these units.

More and faster vaccination will in fact reduce the demand for medicines and there is no major positive impact on the Budget on the pharmaceutical sector, Oza said.

"Most of the rise in healthcare spending under various ministries is going towards COVID vaccine, drinking water and sanitation, nutrition and grants for health," Oza said.

Besides, the rich valuations of pharma stocks may keep the gains limited, going forward.

"Most of the pharma stocks are trading at peak valuations with lower RoEs. The sector has already gained about 60 percent in the year 2020 leaving very little scope for making incremental money in 2021," said Oza.

"On the back of PLI scheme, most of the bulk drug companies have also seen re-rating and many of them are trading at or above the valuations of formulation companies."

Stocks to buy

Sedani of Anand Rathi advises buying Granules India, Laurus Labs and Divis Labs from the sector.

The near-term growth of Granules India is likely to be driven by the foray into MUPS products, entry into newer markets and capacity addition in PFIs. Beyond which, its US pipeline and oncology products would drive growth, Sedani said. He has a target price of Rs 455 for the stock.

With continuity of robust growth across segments, Sedani expects the growth momentum of Laurus Labs to continue in the medium to long-term. He has a target price of Rs 424 for Laurus.

He is positive on Divis Labs, given its strong market position, strength in API manufacturing, established long-term contracts with customers and benefit from its CAPEX programs. He has a target price of Rs 4,095 for Divi's Labs.

Oza of Kotak Securities advises adding Cipla and Lupin on declines.

"We like Cipla and Lupin in the frontline stocks but would suggest to add them in declines as both of them are trading at nearly 24 times on FY22E," he said.

Manchanda of Nirmal Bang Institutional Equities picks Dr. Reddy and Sun Pharma from the pharma space.

"Dr. Reddy has very strong visibility on earnings led by the rollout of its complex generic pipeline in the US. The earnings can potentially double from current levels by FY24 if all the key pipeline drugs are successfully commercialised," he said.

Sun Pharma, Manchanda said, is the only Indian player able to successfully build a specialty portfolio led by patented products that are on a structural growth trajectory.

"About 30 percent of US sales of Sun Pharma is from patented drugs, which should compound mid to high teens. The benefit of a specialty portfolio is that is not subject to price erosion as in the case of a generic portfolio plus it offers structural growth and is very less capital intensive allowing higher cash flows," he said.

Chepa of CapitalVia Global Research advises buying Solara Active Pharma Sciences, Granules India, Divis Labs and Poly Medicure for the long-term.

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