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. Buy Buy 1,024 Europe revenues on the revival path. Q2FY2021 was a strong quarter for the company and the results met streets high expectations. We have thus raised our earnings estimates for FY23 and have retained estimates for FY22. Cadila Upwards The US business is well placed to grow backed by relatively stabilising Buy Buy 530 price erosion and new product launches. The India business is also gaining traction backed by new products. Q2FY2021 was a strong quarter with results better than estimates. Cadila has reduced its debt substantially in1HFY2021 and basis this we have revised our earnings estimates upwards for FY22/FY23. Cipla Maintained Cipla's domestic business is expected to be a key growth driver While US Buy Buy 950 business is likely to catch up gradually. Q2FY2021 was a strong quarter with margin expanding sturdily on account of cost-optimisation efforts. We have thus revised our estimates upwards for FY21 and have retained FY22 estimates. We have also introduced FY2023 estimates in this note. Divis Upwards Divis reported impressive results for Q2FY21. Divis is witnessing improved Buy Buy 3800 demand traction across its segments of API and custom synthesis business and in order to be able to cater to the improved demand the company has revised upwards its capex guidance. Based on this positive outlook, revised capex guidance and strong Q2 performance, we have raised our estimates for FY2022/FY2023. IPCA Upwards Ipca’s API business is witnessing strong demand traction, which is expected Buy Buy 2560 to sustain going ahead. In order to be able to meet the increased demand, the company is expanding its capacities by de-bottlenecking existing plants and setting up a green field plant at Dewas. Q2FY2021 was a strong quarter with a sturdy 575 bps expansion in margins. On this basis, we have raised our estimates for FY2022 and have also introduced FY2023 estimates. Sun Upwards Backed by a pick-up in the specialty business and new launches in the Hold Buy 612 Pharma US and a strong traction in the domestic business, the growth outlook is healthy. Q2FY2021 was a strong quarter for the company with operating margins expanding by 500 bps y-o-y. We have revised our estimates upwards for FY2021 and FY2022 and have also introduced FY2023 in this note. Torrent Downwards Torrent has reported a mixed performance for Q2FY2021, largely backed by Hold Hold 2871 Pharma growth in the domestic business, while the international business declined. The international business is expected to be under stress, attributable to a weak performance of US business. The Brazil region is also witnessing pressures on account of an adverse currency situation. On the basis of Q2FY2021, we have revised our earnings estimate downwards forFY2021 and FY2022. We have also introduced FY2023 estimates in this note. Lupin Maintained Lupin reported a weak performance for Q2FY21 and the margins declined Hold Hold 1040 by 130 bps due to cost pressures. Going ahead, management expects cost pressures to normalise and has guided for an 18.5% OPM for Q4FY2021 as compared to ~15% in 1HFY2021. Basis this we have largely maintained our estimates for FY22 & FY23. Biocon Maintained Biocon reported a soft performance for Q2FY21 as the biologics segment Buy Buy 495 faced operating challenges. Based on Q2FY21 results, we have largely retained our FY2022 earnings estimates and have introduced FY2023 estimates Granules Upwards Q2FY21 was a strong quarter for Granules with the operating margins Buy Buy 475 expanding by 935 bps y-o-y and the results coming ahead of estimates. Witnessing a strong demand, Granules has revised its PAT growth guidance upwards to 30% for period beyond FY2021as against earlier guidance of 25%. Factoring in strong performance for the quarter, we have revised upwards our earnings estimates for FY2022 and FY2023. Laurus Upwards Q2FY21 was a phenomenal quarter for Laurus with the operating margins Buy Buy 385 Labs staging a 1351 bps y-o-y expansion. The results were way above estimates. Given the strong quarterly performance, and a positive outlook we have revised upwards our earnings estimates for FY2022/FY2023.

November 23, 2020 4 Sector Update

Change in Current Previous Target Company Reason Estimates Reco Reco Price Sanofi Maintained Sanofi reported a mixed performance for Q3CY2020. The performance is Buy Buy 9249 India not comparable to the performance of the previous quarters due to due to completion of its slump sale transaction dated 29 May 2020. Few of the therapy areas were affected due to COVID-19 restrictions which impacted the performance for the quarter. On the basis of Q3CY2021 results, we have maintained our estimates for CY2021 and CY2022. Abbott Maintained Abbott India reported a healthy operating performance for the quarter with Buy Buy 19425 India margins expanding 350 bps y-o-y and ahead of estimates. The company's sales are expected to grow in double digits, backed by a strong performance of its power brands. Basis the Q2FY21 results, we have largely maintained our FY21/22 estimates and have introduced FY23 estimates. Strides Maintained Q2FY2021 was a soft quarter for Strides with results missing estimates. Buy Buy 864 Pharma The performance for the quarter reflects the impact of the COVID-19 sciences related turbulences. Going ahead, the outlook for Strides is healthy and the management expects 2HFY21 to be stronger than 1HFY21. We have retained our estimates for FY22/FY23. Shilpa Downwards Q2FY2021 was a soft quarter for Shilpa Medicare Limited (SML) and the Buy Buy 570 Medicare results missed estimates. Also the company had received a warning letter for its formulations plant. On this basis, we have reduced our estimates for FY2022 and FY2023. Solara Upwards Solara Active Pharma has reported its best-ever quarterly performance for Buy Buy 1371 Active Q2FY2021 with results coming in ahead of estimates. Given the strong Pharma demand traction and commissioning of Vizag plant, the company sees 2HFY2021 to be stronger than 1HFY2021. Consequently, we have revised upwards our earnings estimates for FY2022/FY2023. Source: Company, Sharekhan Research

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