Sun Pharma, Dr Reddy's Labs to Cipla - Here is what Investec suggests to watch out for in the Pharma Sector.
Prabhudas Lilladher revised their FY21E / FY22E & Target price for Cadila Healthcare, Torrent Pharma, IPCA, Alkem Labs & Glenmark Pharma.
Investec believes that strong earnings delivery, no near-term visible earnings risk and supportive news flow, has kept the pharma sector as a preferred Sector over the last 6 months. They expect Q2 to be strong as well (EBITDA growth of 16% YoY / 1% QoQ) with India / U.S. numbers improving QoQ and API / RoW to continue with robust momentum. IPCA, Aurobindo Pharma, Natco Pharma, Dr.Reddy’s Labs & Alkem labs have high share from APIs to gain. Investec large cap picks are Sun Pharma, Aurobindo Pharma, Cipla while Midcap Picks are IPCA, Natco Pharma and Torrent Pharma. Top Sell Ideas are Lupin, Cadila Healthcare, Alkem Labs.
Key to watch out for commentary on:
a) India – Acute growth bounce back, impact of slowdown in GDP growth, Trade-generics share gains, sustainable cost savings, Covid portfolio outlook;
b) U.S. – Normalisation of Buyer interactions, U.S.FDA restarting inspections (virtual / physical);
c) Momentum for API / RoW biz and longer term trends
India: Recovering, not fully there
After a depressed Q1, Q2 will be better. Prabhudas Lilladher forecasts 6% YoY for their coverage vs -1% in Q1 FY21. A few cos like Cadila Healthcare, Cipla and Glenmark Pharma should benefit from Covid-19. Alekm Labs growth would be weak (-1% YoY) given its high dependence on acute. Companies like Torrent Pharma (high chronic exposure) and IPCA (strong execution) are expected to do better than others.
Key to watch:
a) Trade generics – strong in 1Q but high growth here can hurt Branded;
b) Acute – can this bounce back in coming Quarters as people become more hygiene conscious;
c) Cost Savings – sustainable quantum
US: growth over Q1
Expect 5% QoQ growth in Q2 FY21 as the situation normalises and more patients visit hospitals/ clinics. Injectables, derma, OTC & specialty categories are expected to recover in Q2 after a fall in Q1. Expect Sun Pharma , Lupin (metformin XR re-launch / albuterol launch) and Dr. Reddy’s Labs (new launches) to deliver good growth QoQ. Torrent Pharma & Glenmark QoQ growth to remain muted due to lack of approvals / launches.
Key to watch:
a) Trade interactions – Cos benefitted in 1Q due to limited penalties / low price erosion. Is this normalising?
b) USFDA Inspections – Will FDA start online desktop reviews / onsite visits to Indian plants soon?
API: Momentum could continue
After a strong growth surprise in Q1 FY21 led by Covid induced stocking up / price increases, Prabhudas Lilladher expects Q2 to deliver robust growth (16% YoY) as well, as some benefits continue – QoQ there could be a minor de-growth. IPCA, Aurobindo Pharma, Natco Pharma, Dr.Reddy’s Labs & Alkem labs have high share from APIs to gain. While it could surprise in Q2 as well, longer term forecasting for this business remains a challenge.
Key to watch:
a) Pricing / Supply situation – it remains unclear if favourable trends on API biz would continue;
b) Shift from China – there is a trend but the extent remains unclear
RoW: A mixed bag
RoW was a mixed bag in Q1 FY21, some Cos de-grew whereas some grew exponentially as they benefited from stocking up. In Q2 Prabhudas Lilladher expects branded business to do better and generic / institutional to be robust. Weak EM currency can play spoilsport.
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Key to watch:
a) Demand trends – sustainability of such strong growth for some Cos remains a question;
b) Branded markets - are these expected to recover in-line with trends in India / US?
Earnings, Target prices & rating changes
Prabhudas Lilladher revised their FY21E / FY22E & Target price for Cadila Healthcare, Torrent Pharma, IPCA, Alkem Labs & Glenmark Pharma as they incorporate outlook, U.S.$ / INR and higher multiples reflecting sector buoyancy. They also downgraded Cadila Healthcare to a Sell from Hold earlier & Torrent Pharma to hold from buy largely on account of rich valuations. Large cap picks are Sun Pharma, Aurobindo Pharma, Cipla while Midcap Picks are IPCA, Natco Pharma and Torrent Pharma. Top Sell Ideas are Lupin, Cadila Healthcare, Alkem Labs.
(Authored by Rahul Kamdar)
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