Stability narrative supports pharma with resilient India formulations theme, CRAMs
As most sectors face impending headwinds of recession and monetary tightening besides high valuations, we expect pharma to provide stability on the back of stable growth prospects and reasonable valuations.
After ~12% correction in Nifty Pharma over the last one year, we believe current levels more or less factor in US generics-specific pain and transitory margins pressure on account of RM inflation, higher logistics and supply related challenges. Our observation suggests that during FY19-23E, while the US contribution to the overall I-direct Pharma universe has gone down from 32% to 29%, that of India branded has gone up from 29% to 34%. This has reflected in EBITDA margin expansion from 20% to 22%. I-direct India formulations is expected to grow at a CAGR of 9% over FY22-24E (on a high base of FY22) while the US is poised to grow at a CAGR of 8% over FY22-24E on the back of favourable currency movement.
Our stability argument for pharma is mainly based on a stable India branded formulation outlook, which is poised to maintain 11-13% growth trajectory for the next few years with higher chronic diseases incidents, minimum capital investment and improving MR productivity. Our preferred picks are: Torrent Pharma, Ajanta Pharma, Sun Pharma and Abbott. We expect support and earnings comfort on CRAMs, which continues to remain the mainstream pharma theme on visibility capex driven by "China-plus One" theme, which is reflecting in incremental order wins and client additions. We expect ~15% revenue growth in FY22-24E in the CRAMs space. Our preferred picks are" Divi's Laboratories and Laurus Laboratories. Similarly, the US generics space, which still remains competitive, is shrinking in overall revenues. We expect optical recalibration and shift towards specialty and complex generics, which are more remunerative. Our preferred picks are: Sun Pharma, Cipla and Dr Reddy's Laboratories.
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