ICICI Securities remain positive on the pharmaceutical sector considering high possibility of growth revival in India formulations on low base of FY21, stable pricing in US generics and sustenance of cost control initiatives seen during FY21 due to pandemic, albeit partially over long term. Hence, FY22E EBITDA margin would likely be lower than FY21 with resumption of some S,G&A expenses (travelling, marketing etc.) but would still be higher than FY20 levels. ICICI Securities believes underperformance of the sector in the last few months has factored in this concern. ICICI Securities maintains a positive stance on the Pharma sector. Considering the recent stock price movement, ICICI Securities have upgraded Divi’s, Pfizer and Jubilant Pharmo to BUY from Add.

COMMERCIAL BREAK
SCROLL TO CONTINUE READING

See Zee Business Live TV Streaming Below:

ICICI Securities have assumed an increase in SG&A expenses for FY22E over FY20 levels and any incremental savings will provide an upside. ICICI Securities prefer companies with a strong India business, complex generics pipeline for the US and improving return ratios.

India growth to revive in FY22E, US to steadily improve:

IPM reported a muted growth of 1.9% in MAT Feb’21 (as per AIOCD-AWACS) due to lockdown impact. ICICI Securities believes 10% growth is sustainable over medium-term with 4-5% volume, 3-4 price and 2-3% new products growth, and FY22E may witness higher growth on a low base. US sales have stabilised over past few quarters as price erosion has come down and new launches continue. ICICI Securities expect US sales to gradually improve hereon for companies led by new approvals and complex/limited competition products. Resumption of USFDA inspections would help companies in resolving existing issues but could be a concern for other plants, if found non-compliant.

Savings in S,G&A expenses partially sustainable:

The companies witnessed significant cost savings in India & other branded generic businesses during the pandemic as travelling and promotional costs were restricted. These costs are gradually increasing as witnessed during Q3FY21 and we expect normalisation in FY22E. We expect a hybrid model (digital+physical) to be the norm in the future which will help in sustaining some of the cost benefits. ICICI Securities have assumed S,G&A to be higher in FY22E over FY20 and any incremental savings would provide upside.

Pharma Top picks:

Cipla (BUY):

Focus on India & branded generic segments along with profitability improvement and high growth visibility

Alkem Labs (BUY):

 Solid India business, improving margin trajectory, consistent track record of growth outperformance and attractive valuations

Abbott India (BUY):

Strong growth across therapies and marquee products to continue, generate strong cash flows pushing return ratios even higher