Aurobindo Pharma, Biocon, Dr Reddy’s Lab and Divi’s Laboratories: Resilient demand points to another good year for Pharma Sector says HSBC

After four difficult years, the India pharma sector rallied in 2020, and HSBC expects the benign operating environment to lead to another good year. HSBC revised their estimates and target prices, and rolled forward our valuations to December 2022e from September 2022e. HSBC also preview Q3 FY21e results, where they expect the recovery to continue for most of the companies that HSBC covers.

Key themes:

1) Steady domestic and export demand – The increasing adoption of low-cost generics by healthcare systems around the world should support growing demand in export markets. The secular growth story remains intact for the India pharmaceuticals market (IPM) and the recovery seen in the past few months indicates resilient demand. Customer preferences for diversified sourcing such as the “China+1” strategy should support demand for active pharmaceutical ingredients (APIs).
 
2) Benign regulatory outlook – While the outcome of the US Food and Drug Administration’s (FDA) inspections remains unpredictable, we believe India’s major pharma companies are better prepared for plant audits after upgrading quality controls systems in recent years. The FDA’s focus on consistency of supplies and improved communication with manufacturers augur well for the sector
 
3) Covid-19 vaccine supply deals –These deals should be meaningful but short-lived opportunities. HSBC estimates vaccine supplies will result in 10-20% upside to our FY22-23e sales estimates for Dr Reddy’s, Cadila, and Aurobindo Pharma.
 
Preferred stocks: Despite the sector’s broad-based rally and rich valuations, HSBC believe selected stocks with cost advantages and good visibility about scaling up key segments have further room to run.

HSBC prefers four Buy-rated stocks:

Aurobindo Pharma –  Strong outlook for US generics, including injectables, cost competitiveness and potential gains from Covid-19 vaccine.

Biocon – favourable positioning in biosimilars in regulated markets

Dr Reddy’s – strong outlook in India, and potential gains from COVID-19 vaccine

Divi’s Lab – capex increases the business’s visibility, and cost competitiveness