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Stability narrative supports pharma with resilient India formulations theme, CRAMs
What's buzzing?
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.
Context
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 Perspective
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.
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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