Pharma stocks have been in the focus amid the turmoil caused by the coronavirus outbreak, as experts and brokerages say that the sector is better placed to navigate the economic crisis brought by the pandemic.
The highly contagious virus has taken a huge toll on most sectors, but pharma companies have withstood the carnage, with some stocks delivering healthy returns.
Experts say that the pharma and healthcare sectors have a crucial role in supporting the government and people and are doing a great job by managing medicine supplies as demand remains strong.
The BSE Healthcare index has closed in the green in the last four consecutive sessions. BSE Healthcare has emerged as the top gainer among sectoral indices, jumping 29 percent since March 25, the day the three-week lockdown began.
Pharma, as a sector, has emerged a strong contender to drive the next leg of the rally. In anticipation, pharma stocks have seen a huge run-up in the last few days.
Since February 1, the BSE Healthcare index is 4 percent up against a 23 percent fall in the Sensex, as of April 9 close, data from Ace Equity shows.
Shares of IOL Chemicals & Pharmaceuticals, Abbott India, Torrent Pharmaceuticals, Cadila Healthcare and Cipla have surged up to 44 percent since February 1.
However, shares of Take Solutions, Shalby, Jubilant Life Sciences, Aster DM Healthcare and Piramal Enterprises have cracked up to 50 percent during the period.
The road ahead
Brokerages say the 21-day lockdown has sprung several unprecedented challenges for the sector such as lower employee attendance, logistic problems and a shortage of accessories like packaging and labelling material. These have led to lower capacity utilisation at most plants.
The sector, however, is well-positioned to endure the coronavirus pain, brokerages say.
"In pharma, barring few supply-related disturbances, we do not envisage material earnings impact in FY21. Also, note that in this unprecedented global lockdown, pharma and healthcare services, being at the top layer of essential services, remain exempted everywhere," said brokerage firm ICICI Direct.
HDFC Securities has a positive view on the sector, too. The brokerage says its positive stance on Indian pharma is premised on sector’s relative resilience to coronavirus disruption, favourable currency tailwinds and stable outlook for India and the US business.
HDFC forecasts 11 percent growth for its covered companies over the next two years. However, the brokerage identifies extended lockdown as a risk, as it can impact demand and manufacturing.
Moreover, a delay in key approvals, delay in the USFDA plant resolution due to travel advisory, EM markets currency risks and subdued demand are seen as the key risks for the sector.
Stocks to consider
Brokerages say while in the short term most companies will bounce back from the last five years of underperformance, this time around, the leader will be different. Hence, one needs to choose stocks carefully.
Edelweiss Broking suggests following five stocks:
Edelweiss sees Ajanta Pharma as a turnaround story. The brokerage expects the company's margin to improve to 31 percent by FY22 from 27 percent in FY19.
It expects FY20/21/22 EPS of Rs 53/70/83, respectively. At its April 8 closing price of Rs 1,367.5, the stock trades at 23/19/16 times FY20/21/22E P/E and FY22E RoCE of 20 percent.
Degrowth in the Africa business is a point of worry but Edelweiss is quite comfortable with Ajanta's US and India numbers. "We expect Africa to grow by 12 percent over the next two years," Edelweiss said.
Edelweiss sees it as a CAGR story. The brokerage highlighted that Abbott India has seen strong sales growth (organic: 15 percent CAGR; inorganic: 18 percent) in the last 10 years compared to an average 11 percent growth by other Indian pharmaceutical players.
This has been driven by strong execution and acquisition of Piramal Healthcare’s domestic formulation business in May 2010, Edelweiss said.
The brokerage expects FY20/21/22E EPS of Rs 313/360/416. At its April 8 closing price of Rs 17,481, the stock trades at 56/49/42 times FY20/FY21/FY22E P/E and FY22E RoCE of 23 percent.
"The Indian government periodically issues a price cap on certain essential drugs. About 40 percent of Abbott’s portfolio falls under Drug Price Control Orders (DPCO), so any incremental coverage would pose a risk to earnings," Edelweiss said.
Dr Reddy’s Laboratories
It is 'new management, new story' theme for Edelweiss as India business is a key focus for the company now.
Edelweiss highlights that despite its strong innovation capabilities since inception, Dr Reddy’s Laboratories is not even among the top 10 domestic formulation players. Its India business was never a focus area for the management, which led to market share loss over a period of time.
"But for the new management, India will be a key focus area. It recently acquired a large portfolio from a competitor," Edelweiss said.
The brokerage expects FY20/21/FY22 EPS of Rs 120/150/174. At its April 8 closing price of Rs 3,683, the stock trades at 31/25/22 times FY20/21/22E P/E and FY22E RoCE of 20 percent.
Any delay in gCopaxone launch can impact FY22E earnings of the company significantly, said Edelweiss. Also, any USFDA issue with its Bachupally facility is a risk.
Edelweiss sees the company as a classic investment story.
The brokerage thinks the earnings of the company will shoot up to Rs 34 per share in FY21E from Rs 9 per share in FY19.
The stock trades at 12 times FY21E P/E. RoCE is seen improving to 13 percent in FY21E from 6 percent in FY19.
Edelweiss expects FY20/21/22 EPS of Rs 24/34/37. At its April 8 closing price of Rs 391, the stock trades at 17/12/11 times FY20/21/22E P/E and FY22E RoCE of 14 percent.
The brokerage said its margin assumption for FY21/22 is 22 percent but any pricing pressure in API/formulation can impact EPS significantly.
It is a participant of mega theme -- biosimilar and TINA, said Edelweiss.
Edelweiss points out that the total biosimilar market size was pegged at $20 billion in 2019 by various studies. The same is expected to touch $60 billion by 2025, the highest growth category for pharma companies globally.
The brokerage is of the view that Biocon has proven its mettle by launching Pegfilgrastim ($4 billion) in the US last year. In March, it received approval for Lantus ($6 billion).
The brokerage expects FY20/21/22 EPS of Rs 7.5/10.2/13.4. At its April 8 closing price of Rs 327, the stock trade at 43/32/24 times FY20/21/22E P/E and FY22E RoCE of 12 percent.
Any facility-related USFDA action is a risk for the stock.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.