Brokerage firm UBS Securities has taken a cautious stance on the pharma sector as it initiated a slew of 'sell' calls on several pharma majors, including the likes of Dr Reddy's Laboratories Lupin, Aurobindo Pharma and Zydus Lifesciences. The brokerage cited a slowdown in India as well as US pharma markets, which make up 70-80 percent of total sales for the sector and would imply lower growth as the key basis for the bearish calls.
Along with the 'sell' calls, the brokerage set a price target of Rs 5,700 for Dr Reddy's and Rs 850 for Zydus Life, projecting a downside potential of around 15 percent and 19 percent, respectively. UBS highlighted concerns that the market may be overestimating the near-term core margins for both drugmakers.
As for Aurobindo Pharma, UBS assigned a price target of Rs 1,333, forecasting a 12 percent downside from current levels due to high valuations in the face of low growth. On the other hand, Lupin received a 'sell' rating despite the brokerage assigning it a price target of Rs 2,250, anticipating a minor 3 percent upside in the counter. The firm stated that the stock is already pricing the one-off benefits of its blockbuster respiratory drug Spiriva in FY25 and FY26.
Aside from that, the brokerage also remarked that balancesheets for pharma majors are healthy enough to invest for new growth drivers, however, growth normalisation may still take some time.
In such a scenario, the brokerage prefers Sun Pharma on which it has a 'buy' call and a price target of Rs 2,450 to factor in a 29 percent upside potential. UBS expects Sun Pharma's patented molecules to double in revenue over the next four years which is the basis of its optimism for the stock. It expects Sun Pharma's margin to expand by 650 basis points to make up for an overall earnings-per-stock (EPS) CAGR of 19 percent.
In addition to Sun Pharma, the broking house has also put its bet on Cipla, assigning it a 'buy' call with a target price of Rs 2,060 to imply an upside potential of over 16 percent. The firm believes that the upside to Cipla's US sales from its injectable and respiratory portfolio are not yet fully factored in its stock price.
While shares of Cipla and Sun Pharma have surged 29 percent and 51 percent in the year so far, respectively, those of Dr Reddy's Laboratories Lupin, Aurobindo Pharma and Zydus Lifesciences have gained 15-67 percent in the same tenure.
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