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Jan Aushadhi—in the fast lane

In another instance exemplifying the Indian government’s intent to push generics, it has set an imposing timeline to achieve its objective of reaching 25,000 Jan Aushadhi stores. The government targets to increase the store count by 2.5X to 25,000 in less than 2.5 years (end-FY2026). Apart from store additions, there is also an effort to improve the geospatial coverage of stores (skewed toward South India currently). On the other hand, the ongoing clamp down on non-compliant manufacturers augurs well for our coverage. Nevertheless, we maintain that current implied domestic valuations of pharma companies do not adequately factor in threats from any acceleration in the pace of adoption of unbranded and trade generics in India.

Jan Aushadhi store count—target of 2.5X growth in less than 2.5 years

In August 2023, without providing a timeline, the government had announced its intent to open 25,000 Jan Aushadhi stores across India. As of November 30, 2023, 10,006 stores have been opened across 753 out of the total of 785 districts in the country. Recently, the government announced that it aims to reach a store count of 25,000 from 10,006 currently by March 2026. We note the government achieved the milestone of 10,000 stores earlier than its aim of end-FY2024. Apart from opening more stores, the endeavor is to improve the geospatial coverage of the stores. Currently, ~33% of the stores are located in South India, with a high skew toward Karnataka and Kerala. Among states, Uttar Pradesh has the highest number of Jan Aushadhi stores at 1,481 currently. The government is targeting sales of Rs14 bn for the PMBJP program in FY2024E. Our channel checks suggest that despite the slight improvement over the past few years, supply chain challenges remain and it will be particularly important to ensure continuity of supplies, amid the rapid store addition.

Ongoing crack down on non-compliant suppliers augurs well for listed cos

One of the key concerns with enforcing genericization in India is the lack of assurance on the quality of unbranded generic drugs. Amid the government’s drive to push affordable unbranded generics, we highlight that the central drug regulator CDSCO has also been increasingly upping the ante on compliance. This bodes well for our coverage, as it is likely to drive further gradual consolidation in the market. However, we believe these are still early days and it will take quite a few years for the quality conundrum to be addressed.

Risk of further acceleration in generics adoption not being adequately baked in

Factoring in the impact of lower prices in the trade generics and Jan Aushadhi (unbranded generics) channels, we estimate a 70-110 bps annual dent on branded growth at least until FY2028E. With Jan Aushadhi’s rapid expansion, there is a risk of this hit on IPM swelling further. Currently, most domestic businesses are trading at an implied valuation of 30-35X FY2025E EPS for acute-heavy companies and 35- 40X FY2025E EPS for chronic-heavy companies. We note that current valuations imply the ongoing steady decline in the share of branded generics will continue and do not factor in any further growth deceleration over the next few years. SUNP, Mankind and Cipla are our preferred picks in the pharma sector.

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