Pharma Stocks are the strongest buys now. Check list of best stocks to buy

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Pee Vee
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Pharma Stocks are the strongest buys now. Check list of best stocks to buy

Post by Pee Vee » Sat May 09, 2020 8:42 pm

ICICI Securities has issued a research report that Pharma stocks poised for re-rating amid panic.

The report states that amid the Covid-19 pandemic panic that has taken a heavy toll on most sectors in the Indian markets, most pharma companies withstood the carnage while some delivered positive returns during this period.

It is stated that most sectors continued to suffer on account of unprecedented lockdowns and limited business continuity plans (BCPs) besides a bleak demand outlook. The cases of Covid-19 are still increasing with significant velocity in many parts of the world.

There is significant uncertainty as to when things will normalise. However, in pharma, barring few supply related disturbances, it does not envisage material earnings impact in FY21.

The rest of the report is as follows:

"In this unprecedented global lockdown, pharma and healthcare services, being at the top layer of essential services, remain exempted everywhere. Now that Chinese supply lines for key starting materials (KSM) and APIs are crawling back to normal, the supply side issues are slowly waning. Overall, we expect hindrances to persist for the next two to three months only with full normalcy from Q2FY21 onwards. Our FY21 earnings estimates for I-direct coverage universe are unlikely to change materially as will be FY22 estimates as there is no change in visibility aspect. However, we expect a multiple re-rating in some stocks, especially for those with 1) stable earnings visibility, 2) no balance sheet stress and strong return ratios, 3) having strong presence in some critical segments besides 4) decent ESG quotient.

On the business front, despite the nationwide lockdown, domestic growth is expected to remain more or less stable. Exports growth, barring for one or two months due to congestion in all major ports globally, is also expected to remain strong due to 1) currency benefit, 2) slowdown in competition due to delay in new approvals that will be beneficial for existing players and 3) expected demand continuum across the world despite Covid-19. Some windfall is also expected in some critical products- a case in point is Hydroxychloroquine, a malaria drug that is likely to be repurposed as a prophylaxis for Covid-19 treatment in some cases. Profitability is also likely to improve due to cooling off of raw material prices (crude based solvents) and continuous focus on cost rationalisation and MR productivity. Improving operating leverage is also likely to contribute to margin expansion. The companies are also moderating their capex plans to focus on better RoCE.

In the following discussion, we briefly touch upon some initial takeaways from the discussions/comments from the managements of respective sub-segments.

Domestic formulations – The demand in the domestic market is normal as of now but movements of MRs are restricted. To address this, companies are using telephonic and digital marketing channels to push products. We believe domestic growth is likely to emanate from price hikes and volume increase (albeit on lower base). However, nationwide lockdown/curfew can still lead to supply related issues like availability of packing materials, etc. Delay in new launches may also impact overall growth. We expect normalised growth from Q2FY21 onwards.
Export formulations – Till date, the shipments are normal even in the worst impacted countries. However, a complete lockdown or restriction on any international trade may impact businesses in future. The beneficial impact of sharp rupee depreciation may take some time to soak in.

API/CRAMs players–On the back of recurring issues in China like shutdown due to environmental concerns earlier and now due to Covid-19, most formulation manufacturers have started looking at India as an alternative source of APIs. This bodes well for API players. For discretionary CRAMs, however, de-stocking at the client’s level is likely to impact near-term spending of large pharma companies in early stage innovative products.
Raw materials – Due to the steep decline in Covid-19 cases in China and restoration of manufacturing (except from Hubei province where manufacturing has just began), supplies of raw materials are about to normalise. Raw material prices are also cooling off though they are still higher than historical levels. However, certain supply chain issues such as heavy congestion at major ports in China for disinfection of ships are likely to persist, thus causing delays in consignments.

Notwithstanding the out and out PE expansion, we prefer a stock specific approach. We categorise pharma coverage companies into following – India specific branded generic players, blended model with higher India branded contribution followed by US and other export destinations, blended model with higher US generics exports followed by India branded contribution and API and CRAMS players.
In our order of preference, we prefer India specific branded players on the back of 9-10% expected growth momentum without much sweat and B/S pressure, favourable market dynamics with doctor prescription stickiness to the fore and lower perceived risk factors. MNCs such as Abbott India, Sanofi and Pfizer are our preferred picks in this category.

We also prefer blended model with higher India branded contribution followed by the US and other export destinations where India remains the main growth engine and other geographies as auxiliary engines. This category also includes cases in which there could be windfall gain opportunities such as the latest case of first generic approval by the USFDA to Cipla's inhalation product, 'Albuterol sulphate' (Proventil HFA) metered dose inhaler that is used to treat bronchospasm amid rise in demand for Albuterol products during the ongoing Covid-19 pandemic. Ipca Labs, Ajanta Pharma, Torrent and Cipla are our preferred picks from this category.

Thirdly, we prefer B2B players like API and CRAMS manufacturing on account of a better regulatory track record, client validation and long term supply agreement with marquee customers and frontloading of capex with specific order book. Divi’s Labs, Syngene and Hikal are our top picks from this category.

We remain neutral on US focused generic players and companies with blended model with higher US generics exposure as we believe the regulatory overhang, higher competition and weaker pricing power continue to act as a major headwind with lower or higher degree in the near term."

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