Much like Nifty companies, pharma giants are now facing a slowdown in earnings growth. After enjoying a joyride through FY24, posting record revenues quarter after quarter, several pharma companies are now staring at a breather in growth momentum. But before we start hoisting the red flag, remember, this is only half the story!
Sure, the sector's big players—Cipla, Dr Reddy's, Aurobindo Pharma, and Lupin—are feeling the heat. A thread that connects them all? Significant dependence on the US generics space and the absence of a bustling pipeline of major drug launches.
While Lupin might be catching a breath with its low-competition respiratory drug, Spiriva, others are running out of air. The golden days of cashing in on blockbuster cancer drug Revlimid are fading fast for Cipla, Dr Reddy's, and Aurobindo, as rising competition and an approaching patent expiry in 2026 are making life tough. Throw in some regulatory speed bumps clogging up the pipeline, and you've got a recipe for a rough ride.
Despite that, shifting the gaze to the midcap space, which houses most pharma companies dependent on the domestic market, paints a much rosier picture. These domestic-focused pharma companies aren’t weighed down by the same troubles plaguing the US generics market. Unlike the US generics market which comes with its struggles of constant price erosion and regulatory challenges, the domestic pharma market is free of those and also sits on a strong growth trajectory.
With this backdrop and an upcoming winter season on our heads, midcap pharma can present itself as a defensive safe haven, especially at a time of looming market uncertainty. That said, remember to keep a check on valuations and earnings visibility when cherry-picking your preferred pharma bets.
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TVS Motor Co (Rs 2,480, -3.2%)
Shares of the second largest electric two-wheeler company fell after Q2 missed Street estimates.
Bull Case: Margin expansion in the coming quarters, driven by the accounting of production-linked incentive (PLI) schemes. Strong growth prospects are forecasted, led by the ongoing upcycle in two-wheelers, market share gains, and an aggressive EV strategy.
Bear Case: The risk of slowing industry growth is a concern. While Jefferies expects TVS to outperform the industry, it suggests that elevated discounts could pressure average selling prices (ASPs) and further impact margin estimates.
Hindustan Unilever (Rs 2,504.75, -6%)
Shares of the FMCG giant tumbled after the company reported a decline in its consolidated net profit for the September quarter.
Bull Case: The rural market saw a steady recovery, and the company could implement a modest single-digit price increase in H2FY25 if commodity prices remain stable. HUL is focused on premiumisation through continuous innovation, which is expected to help it gain market share. Management is optimistic about demand improvement in the coming quarters.
Bear Case: Urban growth has shown signs of deceleration. Key raw materials like palm oil and tea experienced inflation, leading to a decline in gross margins. A prolonged rural recovery, raw material inflation, and rising competitive intensity could pose risks to the company's growth, according to Axis Securities.
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SBI Life (Rs 1,635.90 , -5%)
Q2FY25 results miss Street estimates.
Bull case: SBI Life's agency business (contributing 31% of APE in H1FY25) has been a key driver of growth, with 24% growth in Q2FY25 and 33 percent in the first half of FY25. The company continues to invest in this channel, which has proven resilient and scalable. Importantly, no changes in the commission structure under the new surrender value guidelines create a favorable environment for sustained agency growth.
Bear case: While the agency channel has performed well, SBI Life’s bancassurance channel—driven by its parent SBI Bank—grew only 3% in Q2FY25, a marked slowdown from 9% growth in Q1FY25. This suggests that momentum at SBI’s bank branches may be softening, potentially limiting the growth potential of a crucial distribution arm. Moreover, the new surrender value guidelines are expected to create margin pressures in the coming quarters, even though the company is attempting to offset this by promoting its YONO digital platform.
(With inputs from Veer, Neeshita, and Lovisha)
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