IPM growth negative; expect strong FY22E
As per AIOCD, the India Pharma Market (IPM) reported yet another month pf decline with 2.2% drop in IPM sales primarily driven by acute segments. The decline stood at 3.7% for first five months (Apr-Aug) of FY21. We now expect low single digit IPM growth for FY21 with recovery in H2FY21. Also expect strong growth in FY22E (double digit growth) on a low base as we believe IPM remains resilient in the current pandemic without any material structural impact. US generics business has stabilised after few years of consistent decline with stable pricing and faster approvals. Hence, we remain positive on the sector and expect premium valuations to sustain.
* IPM growth to be muted in FY21E, US generics to improve gradually: IPM reported a decline of 2.2% in Aug’20 as pressure on acute segments like antiinfectives, respiratory, pain/analgesics, gastro etc. continues. Positive growth was observed in cardiac, anti-diabetic and vitamins/minerals/nutritionals. We expect industry growth to turn positive in coming months with further easing of lockdown restrictions. Companies such as Sun Pharma, Lupin, Torrent Pharma, etc. would attain higher growth with larger contribution from chronic segments. US business has been in declining phase over past 3-4 years but revenue run-rate has either stabilised or improving over past few quarters for most companies. We expect this run-rate to improve hereon considering faster product approvals and stable price environment.
* Our view: We believe COVID-19 will not have any structural impact on the pharmaceutical industry over long term considering its growth visibility coupled with its relatively defensive nature. We expect IPM growth to reach 3-4% for FY21E and healthy double-digit for FY22E on a low base. Considering the recent stock price movement, we have upgraded Aurobindo to BUY from Add while Biocon, Cadila, Dr Reddy’s and Jubilant Life to ADD from Hold and downgraded GSK Pharma to REDUCE from Hold and Pfizer to HOLD from Add.
* Top picks:
* Sun Pharma (BUY): Improving business mix, continuous outperformance in India growth, gradual ramp up in specialty sales and attractive valuations.
* Abbott India (BUY): Strong growth across therapies and marquee products to continue, generate strong cashflows pushing return ratios even higher.
* Alkem Labs (BUY): Solid India business, improving margin trajectory, consistent track record of growth outperformance and attractive valuations.
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