Eris Lifesciences, Alkem, Mankind, Torrent Pharma - Steady Growth Story: HDFC Securities Initiates Coverage

HDFC Securities Institutional Equities

The India pharma market has maintained a steady ~10% compound annual growth rate from FY12 to FY23, despite various disruptions, driven mainly by volume expansion ranging between 5-10% during FY12-18, which subsequently tapered to 2-3% from FY19-23, primarily due to generic competition (FY22 growth was on a low base due to the Covid-19 pandemic).

However, this deceleration in volume growth has been somewhat offset by 5-6% price growth annually, since FY19. We expect IPM growth to remain steady at 8-10% over the next few years, with companies boasting strong franchises and brands likely to see faster growth. This growth trajectory will be propelled by-

1. continued price growth of 4-5%,

2. gradual volume growth and recovery in the acute segment, and

3. launches of new products.

Similarly, leading companies are poised to surpass the IPM through strategies like mergers and acquisitions, expanding field forces, and new launches.

We like domestically-focused companies due to their strong pricing power, better margins, and healthy cash reserves/return on capital employed, which have led to a recent rerating among domestic peers.

We consider the volume recovery in the IPM as a crucial earnings driver, essential for sustaining a premium over the Nifty index. Without it, additional earnings upgrades are unlikely.

In light of these factors, we are initiating coverage with a 'Buy' rating for Eris Lifesciences Ltd. (target price of Rs 1,070) and an 'Add' rating for Alkem Laboratories Ltd. (target price of Rs 5,520), Mankind Pharma Ltd. (target price of Rs 2,360), and Torrent Pharma Ltd. (target price of Rs 2,970).

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