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Pharmaceuticals Stellar Quarter; Healthy Outlook Sector Update

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Pharmaceuticals Stellar Quarter; Healthy Outlook Sector Update Pharmaceuticals Stellar quarter; Healthy Outlook Sector Update Q2FY2021 was yet another stellar quarter for pharmaceutical companies under Q2FY2021 Results Review Sharekhan’s pharma universe. The quarter witnessed a sustained improvement in Sector: Pharmaceuticals the US business while the domestic business showed signs of improvement. The overall plant utilization levels during Q2FY2021 were at normal levels (as against Sector View: Positive relatively low utilization levels in previous quarter), thus yielding costs benefits. For the quarter, the pharma companies delivered revenue growth of 8.8% y-o-y, while sequentially as well it clocked a growth of 8.3%. Topline performance was better than estimates and was driven by sturdy performance of the US business, while the India operations also grew a decent pace. Growth in the base business, stabilizing price erosion and new launches led to the growth in US business, while in India business, companies with a relatively higher share of chronic business grew strongly and outperformed the industry. Select players such as Aurobindo, Cadila and Cipla reported strong 12.5%, 18% and 10% y-o-y growth respectively in the US business. Divis labs also reported a strong 21% y-o-y growth in the topline backed by a strong performance in the API segment, while Laurus labs posted a 60% revenue Our active coverage universe growth on the back of an impressive growth in the formulations segment. Operating CMP PT profit for the universe increased sharply by 21% y-o-y. Operating margin also Companies Reco. (Rs) (Rs) expanded by 251 bps y-o-y, better the expected 150 bps y-o-y expansion. During the quarter, marketing activities (including doctor visits) were on the lower side, Aurobindo 848 Buy 1024 leading to substantial savings in operating expenses. Moreover, select players such Cadila 433 Buy 530 as Divis Labs, Sun Pharma and Laurus Labs benefitted from favorable product mix Cipla 746 Buy 950 and operating leverage as well. Collectively, favorable mix, benefits of operating leverage accruing for select players, led to expansion in operating margin. Further, Divis 3545 Buy 3800 lower interest cost and low tax outgo for select players resulted in strong double- Ipca Labs 2193 Buy 2560 digit growth in the universe’s earnings. Companies such as Aurobindo Pharma, Sun Lupin 885 Hold 1040 Pharma, Cadila and Laurus Labs reported a double-digit decline in interest cost on a y-o-y basis, while Sun Pharma reported a tax refund for the quarter. Performance Sun Pharma 513 Buy 612 of players such as Lupin as well as Sanofi India was impacted due to the steep rise Torrent Pharma 2609 Hold 2871 in tax rates for the quarter. Consequently, Pharma Universe’s PAT rose by strong Biocon 420.0 Buy 495 38.7% y-o-y and 9% q-o-q for the quarter and was ahead of estimates. Granules 398.0 Buy 475 Outlook Laurus Labs 290.0 Buy 385 Healthy Growth outlook: Pharmaceutical companies reported an impressive performance for Q2FY2021. Improvement in India as well as US business and Sanofi India 8231.0 Buy 9249 strong operating performance resulted in sturdy double-digit bottom line growth. Abbott India 15198.0 Buy 19425 Management commentaries suggested that the growth traction is expected to Strides Pharma 696.0 Buy 864 improve in 2HFY21 as compared to 1HFY2021. Overall, Indian pharmaceutical sciences companies are better placed to harness opportunities and clock healthy growth Shilpa Medicare 430.0 Buy 570 going ahead. Indian companies are among the most competitive ones globally and hold a sizeable market share in most developed as well as other markets. The Indian Solara Active 1077.0 Buy 1371 pharmaceutical companies have emerged strongly from the pandemic times which Pharma depicts the inherent strength. Moreover, other factors such as - 1) easing of pricing pressures (especially in the US generics market), 2) rise in product approvals and plant resolutions by the USFDA coupled with strong growth prospects in domestic markets and emerging opportunities in the API space would be the key growth drivers. This would be complemented by the strong capabilities developed by Indian companies (leading to a shift towards complex molecules, biosimilars) and commissioning of expanded capacities by select players over the medium term. Collectively, this points towards a strong growth potential going ahead, which would place the companies in a higher earnings growth trajectory as compared to slow earnings growth in the recent past. Valuation Sector View - Positive: Over a longer tenure of 5 years, the healthcare index has Price chart underperformed the benchmark indices and for the period April 2015 to March 200 2019, the healthcare index reported a negative return of 11%. However, over the past 150 year, the healthcare index has outperformed the benchmarks yielding a sturdy 46% return as compared to ~9% return by the benchmark. The strong outperformance is 100 expected to continue going ahead as well and we see this as the beginning of a 50 multi-year bull run. The Indian pharma companies are amongst the most competitive ones globally and over the years have developed strong capabilities, which have 0 laid the footing for a strong growth ahead. The confluence of other factors including 20 20 20 19 20 20 20 - - - - - - - improved growth prospects in the exports as well as domestic markets, moderation Jul Jan Sep of regulatory pressures and a focus on specialty / complex products in addition to Nov Nov Mar May Nifty Nifty Pharma emerging opportunities in the API space would be key growth drivers. Improving growth prospects in the domestic markets could benefit India focused MNC companies. Collectively these point towards a strong growth potential, which would gradually unfold. Consequently, the earnings growth trajectory of pharmaceutical companies is expected to shift upwards. We have Positive view on the sector. Key Risks Any adverse regulatory changes and currency volatility will weigh on the sector; Our Preferred picks: Aurobindo, Cipla, Divis Laboratories, Laurus Labs, Granules, Sanofi India, Abbott India, Strides Pharma Science Outperformers in Q2FY2021: Divis Labs, Cadila, Laurus Labs, Granules Underperformers in Q2FY2021: Lupin and Shilpa Medicare November 23, 2020 2 Sector Update Q2FY2021 results snapshot Net sales OPM (%) BPS Adjusted PAT Particulars Q2 Q2 Q2 Q2 Q2 Q2 YoY% QoQ% (YoY) (QoQ) YoY% QoQ% FY21 FY20 FY21 FY20 FY21 FY20 Under active coverage Aurobindo 6483.0 5600.0 15.8 9.4 22.1 20.8 125.3 88.0 819.6 666.7 22.9 6.4 Cadila 3820.0 3367.0 13.5 4.9 22.6 18.6 402.2 20.1 605.0 375.0 61.3 33.3 Cipla 5038.3 4395.8 14.6 15.9 23.4 20.7 265.9 -77.5 665.4 471.4 41.2 15.1 Divis 1749.3 1446.0 21.0 1.1 43.3 33.9 933.3 279.4 519.6 356.8 45.6 5.6 IPCA 1361.1 1283.9 6.0 -11.3 26.5 20.7 575.4 -1180.2 267.1 193.1 38.3 -40.0 Lupin 3835.0 3882.0 -1.2 8.7 15.2 16.5 -134.7 132.0 211.0 360.9 -41.5 97.4 Sun Pharma 8553.1 8123.0 5.3 12.8 27.0 21.9 507.5 373.7 1929.0 1059.8 82.0 1.6 Torrent Pharma 2017.0 2005.0 0.6 -1.9 31.5 27.0 450.0 -66.7 310.0 244.0 27.0 -3.4 Total - A 32856.8 30102.7 9.1 8.3 24.7 21.3 336.6 56.9 5326.7 3727.7 42.9 5.1 Under soft coverage Biocon 1744.8 1567.6 11.3 4.4 22.4 25.7 -334.8 -230.3 173.8 157.6 10.3 14.3 Dr Reddy's Lab 4910.9 4812.8 2.0 10.9 25.1 29.5 -436.9 -20.0 764.5 630.0 21.3 30.3 Granules 858.1 699.5 22.7 16.7 29.9 20.5 935.2 492.2 163.6 95.8 70.8 46.8 Laurus Labs 1138.8 712.4 59.9 16.9 32.8 19.3 1350.7 426.7 241.7 56.1 330.8 40.8 Abbott India 1054.9 1055.0 0.0 -0.9 22.8 19.3 347.1 88.7 180.7 178.3 1.3 0.2 Sanofi India* 686.6 779.1 -11.9 -3.4 28.0 22.5 546.7 305.3 133.0 166.0 -19.9 -1.6 Strides Pharma Science 793.6 715.1 11.0 1.5 19.8 20.5 -69.2 49.4 44.2 48.5 -8.9 -16.6 Shilpa Medicare 278.9 289.9 -3.8 25.2 24.6 23.5 117.3 -485.9 45.4 50.8 -10.6 78.0 Solara Active Pharma 397.6 351.1 13.2 14.1 24.5 19.4 518.2 569.3 56.7 28.9 96.2 34.0 Total - B 11864.2 10982.5 8.0 8.5 25.4 25.2 19.0 79.5 1803.6 1412.0 27.7 23.7 Grand Total (A+B) 44721.0 41085.2 8.8 8.3 24.9 22.4 251.6 62.9 7130.3 5139.7 38.7 9.3 Source: Company, Sharekhan Research, *Q3CY20 results Valuation Reco / EPS (Rs.) P/E (X) Particulars CMP (Rs.) PT (Rs.) View FY20 FY21E FY22E FY20 FY21E FY22E Active Coverage Aurobindo 848.0 Buy 1024 49.7 56.1 61.5 17.1 15.1 13.8 Cadila 433.0 Buy 530 14.8 18.2 20.6 29.3 23.8 21.0 Cipla 746.0 Buy 950 19.2 29.1 34.8 38.9 25.7 21.5 Divis 3545.0 Buy 3800 48.8 72.3 94.4 72.6 49.0 37.5 Ipca Labs 2193.0 Buy 2560 47.8 89.4 97.4 45.8 24.5 22.5 Lupin 885.0 Hold 1040 7.8 27.5 35.6 113.7 32.1 24.9 Sun Pharma 513.0 Buy 612 16.8 23.1 27.4 30.6 22.2 18.8 Torrent Pharma 2609.0 Hold 2871 60.3 73.4 86.3 43.3 35.6 30.2 Soft Coverage Biocon 420.0 Buy 495 5.7 9.7 13.0 74.0 43.4 32.3 Granules 398.0 Buy 475 13.3 22.4 25.9 29.9 17.8 15.3 Laurus Labs 290.0 Buy 385 4.8 11.9 14.8 60.4 24.3 19.6 Sanofi India 8231.0 Buy 9249 205.9 240.0 263.0 40.0 34.3 31.3 Abbott India 15198.0 Buy 19425 279.0 352.8 411.4 54.5 43.1 36.9 Strides Pharma sciences 696.0 Buy 864 15.6 31.4 45.3 44.6 22.2 15.4 Shilpa Medicare 430.0 Buy 570 19.2 21.8 27.0 22.4 19.7 15.9 Solara Active Pharma 1077.0 Buy 1371 32.3 60.7 71.5 33.3 17.7 15.1 Source: Company, Sharekhan Research November 23, 2020 3 Sector Update Upward / Downward revision in earnings estimates Change in Current Previous Target Company Reason Estimates Reco Reco Price Aurobindo Upwards The US business is likely to grow strongly backed by new product launches.
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