Domestic businesses will be key growth drivers for the pharma sector this fiscal year, according to Purvi Shah, deputy vice president, fundamental research, Kotak Securities Ltd.
The sector is expected to see 10–11% growth domestically this year, and most companies have already reached and will surpass this estimated level, according to her. This provides investors with a good buying opportunity.
However, some companies have expensive valuations, and one should wait for corrections due to broader markets, Shah says.
Nifty Pharma has been rising over the last few trading sessions. On a one-month basis, the index has gained 11.25%; while it has risen 21.22% on a year-to-date basis.
Gland Pharma Ltd., Glenmark Pharmaceuticals Ltd., Ipca Laboratories Ltd., Aurobindo Pharma Ltd. and Natco Pharma Ltd. have been the top five performers in terms of one-month performance.
Kotak's top picks in the sector are Cipla Ltd., Mankind Pharma Ltd., and Sun Pharmaceutical Industries Ltd.
It has a 'buy' rating for Cipla at a fair value of Rs 1,235 and an 'add' rating for Sun Pharma at a fair value of Rs 1,245.
Are FDA Inspections A Major Headwind
The United States Food and Drug Administration has initiated several inspections on Indian pharmaceutical companies and many firms have had to work on their manufacturing issues.
The number of inspection letters from the FDA was much higher four to five years ago, according to Shah. Currently, there are several management teams that understand the intricacy of the inspections and the compliance levels and have been clearing the inspections successfully. The plants that have issues raised against them are also addressing the complaints.
On the oral solid dosage side, Indian companies have managed to comply. The issues are mainly on the injectable side, according to Shah.
However, as many companies are maintaining compliance levels successfully, the FDA is not a major headwind at the moment, she said.
Right Time To Enter The Pharma Pack
There will be many opportunities to enter the pharma pack, Shah said. This is because the entire sector has moved up in the last two to three months due to two reasons. First, Q4 FY23 saw management discussing how the cooling off of raw material prices, logistic costs, and fuel will help Ebitda levels from Q1 FY24. This was evident in many earnings releases this quarter.
Second, the 10-12% price hike that companies can adopt will boost their domestic businesses significantly from Q2 onwards. The second quarter also happens to be a seasonally strong quarter in the sector, she said.
Growth Opportunities
On the U.S. front, growth could be impacted if company pipeline levels and approval rates are not in place. These two key factors lead to price erosion for companies, according to her.
Even though the sector's performance has grown, it is better to stay selective, Shah says.
Many companies are presenting strong pipelines and strategically planned launches this year, which has prompted Kotak to have good growth expectations for the current and following fiscal year.
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