Pharmaceuticals Healthy performance; Retain neutral stance Sector Update

Pharmaceutical companies under Sharekhan’s universe reported a healthy Q4FY2020 Results Review performance for Q4FY2020. Q4FY2020 results reflected the partial impact of COVID-19 related disruptions. The quarter witnessed stabilization of price Sector: Pharmaceuticals erosion in the US markets . Also, approvals from the US regulator – USFDA have relatively increased, which augurs well for Indian pharma companies Sector View: Neutral with US exposure. In Q4FY2020, Sharekhan’s pharma universe delivered a revenue growth of 8.2% y-o-y (slightly better than the estimates of 7%), largely driven by strong growth in domestic operations. Select players such as and IPCA reported a strong growth in the exports segment as well. Operating profit margin (OPM) for the universe declined by Our active coverage universe 70 BPS y-o-y to 19.6%. Higher cost pressures due to the impact of COVID-19 (Companies have witnessed a higher logistics costs), decline in gross CMP Companies Reco. PT (Rs) (Rs) margins for select players have exerted pressure on the operating margins. During Q4FY2020, lower tax rates and higher other income reported by Aurobindo 776 Hold 840 select players led to a strong double-digit growth in the universe’s earnings. Cadila 362 Hold 380 Amongst the players, Divis laboratories and Laurus Labs reported a lower tax rate while Dr Reddy’s reported a tax write back. Lupin’s other income 636 Buy 650 almost trebled for the quarter. Consequently, Sharekhan Universe’s PAT rose Divis 2,184 Buy 2,700 by a strong 12.7% y-o-y for the quarter, ahead of the estimated growth of 8%. Ipca Labs 1,643 Buy 1,750 Outlook Lupin 871 Hold 940 The topline for Sharekhan’s pharma universe grew by a healthy 8.2% y-o-y, while adjusted PAT was up 12.7% y-o-y for Q4FY2020. Management 479 Hold 510 commentaries suggest that the performance in Q1FY21 is likely to be weak Torrent Pharma 2,335 Hold 2,780 given the lockdown through the months of April and May. Though most of UR - PT Under review the companies had resumed operations, the ramp up was slower. A near normal operations were reported towards the end of May 2020, pointing at sub optimal utilizations for larger part of Q1FY21. However this is likely to be short term phenomenon. Further the search for an alternative source for procurement of key raw materials / bulk drugs by the global companies is likely benefit Indian companies. The Government of India has also announced certain incentives / measures to promote bulk drugs manufacturing in India. Price chart Collectively these would support growth, albeit over the medium to long term. Due to the COVID-19 pandemic, the USFDA has held back all its inspections. 140 This implies that approvals for plants / units under OAI/WL status could be 110 delayed. Considering the cost-conscious nature of various export markets 80 amidst the economic impact of COVID-19, we believe companies with wider portfolio and integrated manufacturing will be the key beneficiaries in the light 50 of better earnings visibility as compared to others. 19 20 19 20 - - - - Jul Jul Nov Mar Valuation Nifty 50 Nifty Pharma Maintain Neutral stance: Over the past one year, the Nifty Pharma Index has remarkably outperformed the benchmark Nifty index. The Pharma index is up 25.7% y-o-y while benchmark Nifty has corrected by 10% over the past one year. The pharma index growth is more pronounced since March 2020, wherein it has risen by an impressive 53%. The outperformance can be attributable to the defensive nature of the industry. Pharmaceutical companies have emerged strongly amidst the COVID-19 crisis as they offer better earnings visibility. Consequently, the multiples across the sector have been rerated. Although valuation of most pharma companies seems reasonable, the risk of regulatory overhang would stay and could result in a likely stress in the U.S. business. Hence, we maintain our Neutral stance on the sector. However, in the pharmaceutical sector, we like the API space and domestic focused MNC companies. We have a constructive view on this space. Key risks: 1. Any adverse regulatory changes/currency volatility will weigh on the sector, thereby delaying chances of revival; 2. Any prolonged disruption due to covid related issues. Leaders in Q4FY2020: Laurus Labs, Aurobindo, Torrent Pharmaceuticals Laggards in Q4FY2020: , Granules Our Preferred picks: Divis Laboratories, Laurus Labs, Granules, India, Abbott India

July 07, 2020 17 Sector Update

Q4FY2020 result snapshot Rs cr Net sales OPM (%) BPS BPS Adjusted PAT Companies Q4FY20 Q4FY19 YoY % QoQ% Q4FY20 Q4FY19 (YoY) (QoQ) Q4FY20 Q4FY19 YoY % QoQ% Active coverage Aurobindo 6158.4 5292.2 16.4 4.5 21.8 20.0 176.3 130.5 882.2 624.8 41.2 24.3 Cadila 3752.1 3732.8 0.5 3.1 21.1 21.7 -63.4 203.3 444.4 470.5 -5.5 24.7 Cipla 4376.2 4404.0 -0.6 0.1 14.5 21.8 -734.6 -287.3 246.0 520.2 -52.7 -29.9 Divis 1389.7 1267.1 9.7 -0.5 32.0 33.4 -146.7 -339.2 331.2 299.4 10.6 -2.9 IPCA 1073.8 879.6 22.1 -11.5 15.7 18.7 -302.2 -687.4 85.4 97.0 -12.0 -57.3 Lupin 3845.7 3886.6 -1.1 2.0 13.7 20.0 -639.0 227.6 306.5 249.6 22.8 -152.9 Sun Pharma 8184.9 7163.9 14.3 0.4 18.4 14.9 346.9 -318.9 802.6 690.3 16.3 -3.5 Torrent Pharma 1946.0 1856.0 4.8 -1.0 28.2 25.5 267.5 69.3 314.0 205.0 53.2 25.1 Total - A 30726.9 28482.3 7.9 1.1 19.4 20.2 -76.7 -85.6 3412.3 3156.8 8.1 38.6 Soft coverage Biocon 1581.0 1528.8 3.4 -9.6 20.2 26.4 -620.9 -530.6 123.4 213.7 -42.3 -39.2 Dr Reddy's Lab 4448.9 4029.6 10.4 1.2 21.4 20.3 102.9 -210.3 770.6 439.7 75.3 -238.6 Granules 599.9 613.3 -2.2 -14.8 17.0 15.9 110.8 -615.3 34.7 64.0 -45.7 -63.8 Laurus Labs 839.1 635.2 32.1 15.0 22.8 17.6 523.5 255.4 109.6 43.1 154.3 50.3 Abbott India 961.3 906.3 6.1 -10.9 14.4 16.9 -247.4 -783.2 111.0 113.2 -1.9 -40.5 Sanofi India 784.5 717.3 9.4 -5.1 22.5 21.3 119.4 95.8 85.5 92.1 -7.2 -12.1 Total - B 9214.7 8430.5 9.3 -2.8 20.4 20.6 -23.4 -288.2 1234.9 965.8 27.9 1134.4 Grand Total 39941.6 36912.8 8.2 0.1 19.6 20.3 -64.3 -134.4 4647.2 4122.6 12.7 81.4 (A+B) Source: Company, Sharekhan Research

Valuations Reco/ EPS (Rs) P/E (X) PT (Rs.) Companies CMP (Rs) View FY20 FY21E FY22E FY20 FY21E FY22E Active Coverage Aurobindo 776.0 Hold 49.7 52.6 55.9 15.6 14.8 13.9 840 Cadila 362.0 Hold 14.8 16.3 19.2 24.5 22.2 18.9 380 Cipla 636.0 Buy 19.2 24.0 31.4 33.1 26.5 20.3 650 Divis 2184.0 Buy 48.8 62.8 79.3 44.8 34.8 27.5 2700 Ipca Labs 1643.0 Buy 47.8 64.8 81.7 34.3 25.3 20.1 1750 Lupin 871.0 Hold 7.8 29.2 36.7 111.9 29.9 23.8 940 Sun Pharma 479.0 Hold 16.8 21.2 25.8 28.5 22.6 18.6 510 Torrent Pharma 2335.0 Hold 60.3 73.5 95.1 38.7 31.8 24.6 2780 Soft Coverage Biocon 400.0 Positive 5.7 9.2 13.2 70.5 43.4 30.4 Granules 207.0 Positive 13.0 14.9 19.2 15.9 13.9 10.8 Laurus Labs 549.0 Positive 24.0 28.7 36.5 22.9 19.1 15.0 Sanofi India 7547.0 Positive 205.9 227.8 265.0 36.7 33.1 28.5 Abbott India 15800.0 Positive 279.0 320.5 420.7 56.6 49.3 37.6 Source: Company, Sharekhan Research

July 07, 2020 18 Sector Update

Revision in earnings estimate Change in Current Previous Price Company Reason Estimates Reco Reco Target Cement Active Coverage Stocks Aurobindo Downwards Continued regulatory concerns could impact the Hold Hold 840 performance of the company going ahead as a substantial number of fillings are from plants under USFDA inspection and new approvals from these plants are held back. Timely resolution to the regulatory issues is critical for earnings growth and will be an overhang on the stock until fully resolved Cadila Upwards The US business is well placed to grow backed by Hold Hold 380 relatively stabilizing price erosion and new product launches. The India business in the near term seems to be reflecting the impact of COVID-19, though the consumer wellness business is expected to grow in double digits. Q4FY2020 was a mixed quarter and factoring in the above we have revised upwards our estimates for FY21/ FY22 Cipla Maintained Cipla's Q4FY2020 results missed estimates impacted Buy Buy 650 by the COVID- related crisis, which the management sees as a short term phenomenon. With the restructuring at the Indian operations done, planned new launches would strengthen the respiratory franchise. We have broadly maintained our estimates Divis Maintained Divi's reported in line earnings for Q4FY2020. Buy Buy 2700 Completion of the capex program by 2HFY2021, opportunities in the API space and benefits from the backward integration of projects would be the key earnings drivers. Given the in-line results for Q4FY2020, we have largely maintained our estimates forFY2022 IPCA Maintained IPCA reported a weak performance for Q4FY2020. Buy Buy 1750 The management has guided for a double-digit topline growth and 100-150 bps margins expansion. Amidst uncertain times, this is a key positive. Despite weak Q4 performances, we have retained our estimates for FY2021/FY2022 Sun Pharma Maintained Sun pharma's US business is under stress given Hold Hold 510 the pricing issues and slow traction in the specialty business. Domestic business is also likely to witness turbulence in the near term due to COVID related issues. Q4FY2020 earnings missed estimates. We have maintained estimates for FY2021/FY2022 Torrent Pharma Maintained The company is continuing to confront USFDA woes and Hold Hold 2780 it would be an overhang on the earnings performance until fully resolved. Torrent Pharma reported healthy operating performance for Q4FY2020. PAT for the quarter was ahead of estimates. We have maintained our earnings estimates Lupin Upwards Lupin is confronting regulatory headwinds at 3 of its Hold Hold 940 facilities, which are under the USFDA scanner. Lupin's Q4FY2020 earnings were ahead of estimates and We have revised upwards our estimates for FY2021/ FY2022 factoring in the same Source: Company, Sharekhan Research

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July 07, 2020 19 Biocon Limited Biologics to be key growth driver Viewpoint

Biocon is a leading player in the biosimilar space. The biologics division which Sector: Pharmaceuticals includes the biosimilar business constitutes around 30% of the overall revenues Company Update of the company. Recently, the Biologics division has received an approval from the USFDA for its New drug application Semglee, (Insulin Glargine). The Change drug would be available in two forms vial and pen. The drug is indicated to control high blood sugar in patients with type 1 and type 2 diabetes. Semglee’s View: Positive ßà reference drug – Lantus has reported sales of $1.68 bn for vials and $4.3 bn for the pen versions, for the 12 months ending April 2020. Collectively, the CMP: Rs. 400 market for the drug stands at $6.1 bn which is substantial. Semglee is the third biosimilar product to be approved by the USFDA. Further Biocon along Upside potential: 10-12% á with its partner has received a favorable ruling from the USPATB (US patent and trial board) as well as from US district court, which has now cleared the á Upgrade ßà No change â Downgrade path for commercialization of Semglee. The commercialization of the drug is expected in 2HFY2021. In addition to the new launches, the existing products Company details portfolio in the biologics segment too are likely to gain traction and drive the topline growth. The small molecules segment is well set to capitalise on the Market cap: Rs. 39,408 cr opportunities. With regulatory approvals for the two API plants and oral solids facility and a strong traction in the generic formulations segment, Biocon is set 52-week high/low: Rs. 410/211 to report a sturdy topline and earnings performance. Outlook NSE volume: (No of 64.7 lakh Biocon is a leading biosimilar manufacturing company in India and one of the shares) few global companies to receive approvals for its products across the regulated markets of - US, EU, Japan and other developed markets. The company is expected BSE code: 532523 to benefit substantially from the opportunities in the lucrative biosimilars space. A huge opportunity lies ahead in this segment for Biocon, as some of key brands NSE code: BIOCON will lose patent exclusivity in medium to long term. The price erosion in biosimilars is much lesser than that in the other segments. Scientific expertise in developing Sharekhan code: BIOCON and manufacturing complex biosimilars together with commercialization strength of partner companies would further strengthen its presence in globally in the Free float: (No of 47.2 cr biosimilars. Also with the possible listing of Biocon Biologics, there exists a shares) significant value un-locking opportunity going ahead. Our Call Shareholding (%) Maintain positive view with 10-12% upside potential: Immense opportunity lies in the biosimilar space driven by new launches (Semglee) / recent launches in the Promoters 60.7 US. Also traction in existing products would drive the biologics revenues. With regulatory approvals for two API units and oral solids formulations facility, the FII 17.4 small molecules / API business is also expected to grow at a healthy pace. Strong topline growth and earnings visibility, healthy return ratios and a comfortable DII 5.6 debt: equity position makes Biocon an attractive investment opportunity. We have marginally revised our earnings estimates upwards for FY21/FY22 to factor in the Others 16.42 above. Currently, the stock is trading at a P/E valuation of 43.4x/30.4x its FY21/ FY22 EPS, which is lower than its 3and 5years historical average P/E multiples. Further, a possible listing of its wholly owned subsidiary Biocon Biologics India Limited provides a significant value unlocking opportunity and this bodes well for Price chart the company. We stay Positive on the stock and expect an 10-12% upside. 450 400 Key Risks 350 Any delay in product approvals, change in regulations or negative outcomes from 300 USFDA inspections can affect earnings prospects. 250 Valuation Rs cr 200 Particulars FY2018 FY2019 FY2020 FY2021E FY2022E 19 19 20 20 - - - - Net sales 4129.9 5514.4 6367.2 7970.4 10227.4 Jul Jul Nov Mar Operating Profit 806.5 1393.7 1603.1 2127.4 2883.1 OPM (%) 19.5% 25.3% 25.2% 26.7% 28.2% Price performance Adj. PAT 453.3 729.1 680.7 1106.6 1580.9 (%) 1m 3m 6m 12m EPS (Rs) 3.8 6.1 5.7 9.2 13.2 PER (x) 105.9 65.8 70.5 43.4 30.4 Absolute 2.7 25.7 40.7 66.8 EV/Ebidta (x) 60.1 35.0 31.2 23.0 16.8 P/BV (x) 9.3 7.9 7.2 6.4 5.3 Relative to -4.2 3.8 51.0 74.0 Sensex ROCE (%) 5.5 9.9 9.3 11.7 15.7 RONW (%) 8.3 11.4 10.2 14.3 17.0 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

July 07, 2020 20 Know more about our products and services

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