The BSE Healthcare index gave 48% returns in last one year, outperforming the Sensex on the back of robust growth prospects.
The BSE Healthcare index has been a major outperformer over the last year giving 48 per cent returns compared with the Sensex’s 30 per cent. This defensive sector has been favoured by investors due to the opportunities it offers in both overseas generic markets as well as in the domestic pharma space. Recent alliances (Pfizer-Biocon) and acquisitions (Abbott-Piramal) reflect the fast-growing nature of the Indian market as well as higher profit margins, to the tune of 20-25 per cent in the branded formulations space, it offers.
Growth booster
The domestic pharma market grew by 9 per cent annually between 2000 and 2005, but the growth jumped to 13-14 per cent over the period 2005-2010. The higher growth was a function of the rising incidence of chronic conditions, medical infrastructure, insurance cover and launch of new products. The growth has been especially strong in 2009-10, which saw domestic retail sales grow 17 per cent. In fact, in the first six months of CY2010, retail sales have jumped 19.6 per cent year-on-year.
| GROWTH PILL | ||||
| In Rs crore | Sales | Ebitda (%) | PAT | P/E (x) |
| Cipla | 7,570 | 24.0 | 1,390 | 20.1 |
| Sun Pharma | 7,500 | 35.0 | 2,191 | 21.7 |
| Cadila Health | 5,250 | 23.4 | 945 | 16.0 |
| Torrent Pharma | 2,430 | 22.0 | 386 | 11.8 |
| Glenmark | 3,540 | 27.4 | 592 | 17 .1 |
A $55-billion market
Consultancy firm, Mckinsey, believes the Indian pharma industry, which was pegged at $12.6 billion in CY 2009, is likely to quadruple over the next decade to reach $55 billion, growing at a CAGR of 14.5 per cent. According to the firm, a large part of this growth is due to the increasing affordability and spending on healthcare, both by the government and the private sector. Analysts believe one of the reasons for the growth of the market is chronic care therapies, which constitute 30 per cent of the domestic market and have been expanding at an annual rate of 17 per cent over the last three years.
Today, we look at the prospects of three Indian firms which get a significant chunk of their revenues from the domestic market as well as from drugs used in treating chronic conditions, which put together will help drive overall growth. Though drug majors such as Glenmark, Lupin and Dr Reddy’s get less than 40 per cent of overall revenues from domestic operations, investors could look at them, as their domestic operations are growing at a faster pace than the industry average.
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Cadila Healthcare
The company’s domestic formulations business grew by 18 per cent in the September quarter, driven by branded drug sales (which grew 19 per cent), new product launches and higher sales of older brands. The company’s focus on the cardiovascular and respiratory segments is helping support growth in domestic formulations. Elara Securities believes the company will sustain growth rates of 15 per cent over the next two years for its domestic business. The company has expanded its field force by 10 per cent to 4,000 to support expansion into new therapeutic areas. The stock is likely to fetch about 15 per cent from these levels.
Sun Pharma
The company’s adjusted domestic formulation revenues grew by 27 per cent year-on-year to Rs 640 crore in the September quarter. This was on the back of an uptick in demand, new product launches and a good performance of its chronic drugs segment, which contributes over 70 per cent of domestic formulation sales. Post the Taro acquisition, analysts expect the company to post revenues of Rs 7,500 crore by FY12 (it did just under Rs 4,000 crore in FY10) with earnings growing at about 28 per cent to Rs 106. At Rs 2,300 (the stock has gained 31 per cent over the last two months), the scrip trades at 22 times its FY12 estimates. Buy on dips.
Torrent Pharma
The domestic formulation business (half of total sales) of Torrent Pharma registered a growth of 22 per cent y-o-y, which was better than the 17 per cent sector growth in the quarter. The company is investing Rs 600 crore in setting up a new unit at Dahej as well as expanding its facilities in Sikkim and Chatral (Gujarat). While weak margins in its German business and higher costs dented Ebitda margins, strong revenue growth, improving product mix and cost rationalisation will facilitate the company's upward margin bias, believes brokerage Sharekhan. The stock trades at 12 times its FY12 earnings and will fetch 15-20 per cent over the next one year from these levels.