Presence in fast growing segments and markets should enable pharma companies like IPCA, Torrent and Cadila to outperform broader markets.
With the broader markets under pressure, investors are looking at defensives such as the pharma space which are less affected by the macroeconomic headwinds of high interest rates, inflation and slowing growth rates. The BSE Healthcare index, which has delivered a return of 10 per cent over the last year, has outperformed the broader markets (Sensex), which has fallen one per cent during the same period. Notably, select mid-caps have outperformed the broader markets as well as the healthcare index.
Within this space and despite the outperformance, most analysts are bullish on stocks such as Cadila Healthcare, Torrent Pharmaceuticals and Ipca Labs, as they are likely to deliver a robust 24-25 per cent growth in net profits over the next three years. While their top line is estimated to grow by 20-22 per cent, margin growth will be aided by capacity expansion, presence in high-growth regions and product filings/launches.
HSBC Securities and Capital Markets’ analysts Girish Bakhru and Damanyanti Keral say while large-cap generic drug makers are banking on the US for growth, mid-caps are taking a different route. They are not only thriving in the home markets but also in the fast-growing emerging markets. An ICICI Securities report says there is good traction coming from emerging markets (Brazil, Russia, China, Mexico, Turkey and South Korea), as these markets are expected to grow more or less at the same pace as India and with similar demographic and lifestyle changes.
In terms of picking mid-cap pharma stocks which can become tomorrow’s large-caps, Sarabjit Kour Nangra, vice-president, research, at Angel Broking says investors should focus on the twin aspects of stable earnings and business/therapeutic areas which can scale up in terms of size and profitability. Examples of such a transformation are Sun and Lupin. While Sun grew due to its focus on niche areas, Lupin transformed itself from an API (active pharmaceutial ingredient) player to a global generics operation. Such companies tend to grow faster, generate higher cash flows and get re-rated, says Nangra. She believes Strides Arcolab, due to its presence in the oncology segment, should be a good bet. Additionally, Manoj Garg, vice-president, Edelweiss Securities, believes implementation record is important.
CADILA HEALTHCARE
India’s fifth-largest formulation player is likely to grow its domestic sales over 2010-13 by 19 per cent, on the back of additional investments in expansion and a shift in the portfolio mix to high-margin chronic remedies. The company reported a sales surge across geographies in the March quarter, which helped post above-expectation results. In addition, its joint venture (JV) with Hospira reported a 160 per cent sales growth, year-on-year, in 2010-11. The JV is likely to supply more products to the US and EU markets. While good results have helped the stock deliver 19 per cent over the past three months, analysts have price targets around Rs 1,080, which indicates potential upside of about 20 per cent.
| ON A HIGHER TRAJECTORY | |||||
| FY11 in Rs cr | Net sales | FY11-13* | Net profit | FY11-13* | P/E (x) |
| Biocon | 2,618 |
– | |||
Strides figures are for CY10 and CAGR for CY10-12
Source: HSBC, analyst reports
IPCA LABS
The key trigger for the stock is the US FDA approval for its Indore SEZ unit. It has a large pipeline of products for sale in US markets, which is likely to boost its sales growth and profitability. In the domestic market, the company is likely to launch 12-18 products and given an expanded sales force, revenues are expected to grow 18 per cent over the next year. Given product portfolio growth and low cost of operations, margins are expected to move up. Based on a target price of Rs 380, there is room for a 15 per cent upside.
TORRENT PHARMACEUTICALS
The stock has been trading flat over the month, as the March quarter results were impacted by a write-off in the US market and delayed shipments to Brazil. However, on the back of new and existing products, businesses analysts expect its regulated market portfolio to grow 25 per cent. The biggest strength is that two-thirds of its product portfolio in the domestic formulation business (40 per cent of total revenues) is in the fast-growing and profitable chronic therapies area. This business is expected to grow 17 per cent over 2010-13. Given its presence in profitable areas and international growth prospects, analysts have pegged targets at Rs 760-levels (23 per cent upside).
