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Healthcare 2022 Outlook: Embark on CRAMs, hospitals, domestic pharma

ICICI Securities 30 Dec 2021

What’s Buzzing:

BSE Healthcare remained a laggard vis-à-vis broader markets in CY21 after a significant outperformance in CY20.

Context:

While hospital stocks rode on Covid-19 handling, most pharma companies were laggards due to margin pressure in H1FY22 and US revenue slowdown. While margin pressure was attributable to 1) inflation in key starting material (KSM) prices mainly due to China dependency, 2) higher logistical costs due to congestion at major global ports amid Covid, the US slowdown was due to price erosion in the US amid higher competition in simple generics and lack of complex launches. These two headwinds outweighed strong domestic formulations performance, robust CRAMs numbers and uptick in hospitals in the overall healthcare space.

Our perspective:

Going ahead, amid waning concerns on raw materials price volatility and logistical issues (both with a lag) we continue to remain theme-specific and prefer CRAMs as the main theme (I-direct CRAMs universe expected revenues CAGR of ~13% in FY21-23E) with an additional lever from incremental backward integration besides execution prowess and visibility capex (preferred picks- Divi’s Labs, Syngene, Suven Pharma, Laurus). We expect hospitals (I-direct Hospitals universe expected revenues of ~CAGR 25% in FY21-23E) to maintain better margins due to 1) sustainable cost rationalisation and 2) better occupancy and ARPOB as the profile of new hospitals continues to mature (preferred picks - Apollo, Narayana, Aster DM). Domestic formulations (I-direct domestic formulations select pack expected revenues CAGR of ~14% in FY21-23E) are set to continue their double digit growth story with significant traction from non-Covid portfolio besides full-fledged MR activities and digital drives (preferred picks - Sanofi, Abbott, Cipla, Sun Pharma). We remain cautious on US generics due to legacy pricing and compliance issues but expect traction from H2CY22 mainly due to few impending complex launches, USFDA clearances for plants and rebalanced US portfolio.

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