The brokerage company Sharekhan has maintained its positive stance on pharma stocks, despite the fact that Q4FY2022 was a poor quarter for pharmaceutical companies, plagued by higher cost pressures as increased raw material costs and freight costs pulled down profitability.

The brokerage company Sharekhan has maintained its positive stance on pharma stocks, despite the fact that Q4FY2022 was a poor quarter for pharmaceutical companies, plagued by higher cost pressures as increased raw material costs and freight costs pulled down profitability.

The brokerage has given a “BUY" rating to the shares of Zydus Lifesciences for a target price (TP) of ₹ 440, Cipla (TP- ₹ 1,150), Divis (TP- Rs. 4,900), Lupin (TP- ₹ 780), Sun Pharma (TP- ₹ 1,000), Torrent Pharma (TP- ₹ 3,540), Biocon (TP- ₹ 420), Laurus Labs (TP- ₹ 735), Sanofi India (TP- ₹ 9,250), Abbott India (TP- ₹ 22,780), Strides Pharma sciences (TP- ₹ 450), Dr Reddys Laboratories (TP- ₹ 5,550), Gland Pharma (TP- Rs, 3,770).

Sharekhan has given a “HOLD" rating to the shares of Aurobindo (TP- ₹ 610), Ipca Labs (TP- ₹ 1,080), Granules (TP- ₹ 290). The brokerage has also given a “Positive" rating to the shares of Caplin Point Laboratories (TP- ₹ 895), Metropolis Healthcare (TP- ₹ 1,966), Alembic Pharmaceuticals (TP- Rs. 944) and Medplus Health Services (TP- ₹ 1,033).

The brokerage has said in its research report that “Q4FY2022 was a weak quarter for pharmaceutical companies under our universe, marred by higher cost pressures as elevated raw material costs, freight costs drove down margins. Higher pricing pressures in the US (for select segments the price erosion was in double digits) also added to the margin pressures. Performance of the India business was strong, backed by a strong revival in the acute therapies while chronic therapies sustained their growth momentum. Sustained elevated pricing pressures and high channel stocks in select segments, impacted the companies’ US business, slowing down growth. Consequently, while revenue growth was healthy, however elevated cost pressures leading to a 220 bps y-o-y margins decline, resulted in the our universe’s earnings declining by high single digits."

According to Sharekhan Q4FY2022 was the third consecutive quarter, wherein pharmaceutical companies were impacted by surging cost pressures. China-related issues (including energy crisis) have impacted raw material availability, leading to sustained higher in input prices. This was compounded by container shortages at ports, leading to elevated freight costs. Further with the markets across the globe opening up the marketing & promotions spends were close to normal levels. This coupled with higher raw-material cost and freight costs exerted margin pressures, leading to a 220 bps y-o-y decline in OPM.

Indian pharmaceutical companies are better placed to harness opportunities as they are competitive globally and hold a sizeable market share in most markets. Moreover, other factors such as 1) long-term opportunities in the US with increasing preference for specialty/complex generics (including biosimilars) and injectables, 2) Expected healthy growth in IPM, which is expected to stage close to double-digit growth in FY2023 as well, and 3) Emerging opportunities in the API space would be key growth drivers over the medium to long term; while in the near term, pricing pressures in the US and cost pressures could act as headwinds, though transient in nature. Collectively, this points towards a strong growth potential over the long term for Indian pharma companies, said the brokerage.

“Over the past around two years, the Pharma index, has consistently outperformed the benchmark indices reporting a sturdy 50% returns as compared to a 37% returns by the benchmark. Strong outperformance is expected to continue going ahead as well. Albeit over January 2022 till date, Nifty Pharma has underperformed the benchmarks, factoring in transient headwinds, which could drag the performance of companies in the near term. Over the years, Indian pharmaceutical companies have developed strong capabilities and have proven to be a dependable source for global pharma companies. The confluence of other factors including focus on specialty/complex products in addition to emerging opportunities in the API space would be key growth drivers. Collectively, though near-term headwinds are likely to sustain, longterm growth prospects are intact and, based on this, we have a Positive view on the sector," Sharekhan has claimed based on the valuations of the pharma sector.

Sharekhan has highlighted adverse regulatory changes, delay in plant inspections, and currency volatility as the key risks to the financial performance of the companies in the sector which investors should be aware of.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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