Pharma has been among the best performing sectors in 2020, due to anticipation on reporting higher revenue amid the pandemic. In a once in a century kind of health crisis, the pharma industry in India, which is the largest provider of generic medicines globally, is projected to benefit.
Even globally, the sector has seen a rally in recent months. American ace investor Warren Buffett Berkshire Hathaway invested in four large drugmakers in the recent months, which includes Merck & Co, Pfizer, Abbvie and Bristol-Myers Squibb.
There are discussions on whether the global rally due to COVID-19 will be reflected in domestic stocks. However, analysts believe that the Indian pharma isn't just a COVID theme. Nomura India still holds an overweight rating on the pharma sector, saying in its latest equity strategy report that the earnings upcycle in frontline pharma companies is here to stay.
The brokerage has limited its top picks to the frontline companies with sustained earnings recovery, such as Dr Reddy's Labs, Lupin and Sun Pharma while removing Jubilant Life Sciences and Glenmark Pharma from its portfolio.
Talking about her picks from the sector, Nithya Balasubramanian, pharma and healthcare analyst at Sanford Bernstein, has similar choices, naming Dr Reddy's Labs besides, Cipla, Sun Pharma and Lupin, given that they have a strong pipeline in the US.
1. Cipla Ltd
Broking firm KRChoksey had placed a "buy" rating on Cipla at the start of the month with a price target of Rs 894.
"The company was able to garner 65% market share (Q1FY21) in Proventil market with its newly launched Albuterol Sulfate. Approval for another promising ANDA, Advair Diskus of GSK (having an addressable market of $ 2.9 bn), is expected soon. Cipla's domestic business is on track after disruption in trade generics," it said.
Centrum Broking has an "add" rating on Cipla with a target price of Rs 845. The brokerage has maintained multiple at 25x.
ICICI Securities has upgraded the stock to "buy" rating with a target price of Rs 910.
The brokerage has raised its FY21-FY23 earnings estimates by 8-9% for the stock, to factor-in higher India sales and better margin profile (~100bps). It also raised target P/E(x) to 26x from 25x considering the increasing proportion of India sales, improving margin profile and strengthening the balance sheet. It also said that the key downside risks for the stock are regulatory hurdles, forex fluctuations and lower growth in the Indian market.
2. Sun Pharma
Kotak Securities has a "buy" rating on the stock with a target price of Rs 525. The brokerage said that post-correction, Sun Pharma has formed strong reversal formation near an important retracement level.
Emkay Global also has a "buy" rating on Sun Pharma with a target price of Rs 560. The target price represents a P/E multiple of ~20x on its FY23E EPS.
The brokerage said that the catalysts to its upside will be speciality sales growth, Halol plant resolution and recovery in the branded markets. On the other hand, downside risks include a lower-than-expected uptick in Specialty, adverse regulatory outcome, a significant slowdown in branded markets.
Motilal Oswal has a "buy" rating on Lupin with a target price of Rs 1,130, valuing the stock at 25x 12M forward earnings to arrive at the target price. Centrum Broking has an "add" rating on the stock with a target price of Rs 1,060.
The brokerage expects better ramp-up of gPro-air and better flu season to pick-up in the second half of the financial year. The injectable portfolio launch may also be slightly gradual, it said.
"In FY21E, bEtanercept launch and gFostair launch to add to earnings in EU. While the consistent higher R&D and higher other expenses it has lowered estimates by 6%/5% for FY21E/FY22E, respectively."
4. Laurus Labs Ltd
Motilal Oswal has a "buy" rating on Laurus Labs with a target price of Rs 400. The brokerage remains positive on the stock on the back of a) its superior execution in the ARV segment, b) its strong chemistry skill set driving the CDMO business, c) the addition of new molecules in the Other API segment, and d) cost efficiency aiding profitability.
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