Pharma sector Q3FY24 review: A mixed quarter, India business sees sharp recovery; what is next?

Pharma sector Q3FY24 review: As the third quarter (Q3 FY24) earnings season comes to a close, the analysis of different companies' and sectors' performance is on everyone's radar. As regards the pharmaceutical industry, analysts note that the companies in the sector have overall put up a mixed show for the October–December period. 

As per Axis Securities, hospitals experienced a seasonally weak quarter, and going forward, brownfield expansion initiatives are anticipated to drive growth without significant dilution in return on capital employed (RoCE). 

InCred Equities said in a report that India's business witnessed a sharp recovery and was up 11 per cent year-on-year (YoY) after a weak 1HFY24 performance.

Internationally, US business was up 6 per cent quarter-on-quarter (QoQ) and has sustained strong momentum since 1QFY24.

What lies ahead?

For the full FY24, Axis Securities' analysts anticipate high single-digit growth for the sector on the back of the US business largely holding up its strong momentum, margins sustaining and, in some cases, even improving, and the domestic business recovering.

Along similar lines, InCred is broadly positive on the sector and expects the outperformance to largely continue, with the momentum sustaining in the India and US markets as well as on the margins front. 

Further, Axis Securities expects the margins to improve as raw material and freight costs have normalised. On the other hand, the brokerage says that the US Food and Drug Administration (USFDA) inspections will remain an overhang, and price erosion in the US will increase once supply is normalised.

The brokerage expects a weak season in the short term and believes the National List of Essential Medicines (NLEM) is likely to impact growth. NLEM is a list of medicines sold below a price ceiling fixed by the National Pharmaceutical Pricing Authority (NPPA).

However, from a medium-term perspective, Axis Securities expects better sales growth led by gRevlimid and the launch of new products, gSpiriva and gPrtezista. Further, field force expansion will drive growth in India, and better margins are estimated due to normalised cost inflation and moderation in US price erosion. 

In the pharmaceutical industry, field force engagement means the process of actively empowering field teams, like sales teams, medical experts, or customer support agents, to increase efficiency, productivity, and even job satisfaction, explains Digitalya. 

Analysts at InCred Equities are also broadly positive on the sector and expect the outperformance to largely continue. With the momentum sustaining in the Indian and US markets as well as on the margins front, the brokerage prefers stocks where the earnings momentum is likely to remain strong in the medium term. 

Where should investors bet?

InCred has upgraded Zydus Lifesciences’ rating to 'add' from 'hold' as it expects the company to largely sustain its growth momentum. 

Similarly, it has also upgraded Sun Pharma’s rating to 'add' from 'hold' as it feels that the strong momentum will continue in specialty sales. 

Conversely, the brokerage has downgraded Cipla’s rating to 'hold' as it reckons the stock price has run up while the company has delayed key launches. Similarly, it has downgraded Gland Pharma to 'reduce' due to the delay in Cenexi synergies. 

Axis Securities says that Lupin, Aurobindo Pharma, and Cipla are its top choices and has given a 'buy' on all three with a target price of Rs 1,770 apiece, Rs 1,160 apiece, and Rs 1,515 apiece, respectively.

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