By Amrit Pal Singh Gill
In 2020, the global pharmaceutical markets are facing major discontinuities. There’s a widespread belief that despite the decline in the overall growth in the developed markets due to COVID-19, the emerging markets will play a key role in this sector in the 2020’s. The major markets to result in this positive outlook involve the Indian pharmaceuticals, the Chinese, the Brazilians, and the Russians who will spearhead growth within this global industry.
Coming closer towards the southeast Asian front, the Indian pharmaceuticals market is very unique. Firstly, the branded generics dominate the market, capturing up for 70 to 80 %. Secondly, even though with lower market capitalization, local players enjoy a dominant position which are driven by formulation development capabilities and avenues for new investments. Thirdly, this intense competition leading to red ocean drives the price levels low. It should also be mentioned that even though Indian markets is ranked tenth globally in terms of value, it creates more opportunity in terms of increased volumes, being ranked third. This unique situation presents it own opportunities and challenges.
In quantitative terms, Indian pharma sector supplies over 50 % of the global demand for various vaccines, 40 % of the generic demand for the US and 25 % of all medicines for the UK. India contributes the second largest share of the pharmaceutical and biotech workforce in the world. India’s domestic pharma market turnover reached Rs 1.4 lakh crore (US$ 20.03 billion) in 2019, 9.8% y-o-y up from Rs 1.29 lakh crore (US$ 18.12 billion) in 2018. Nationalities all across the world seek to receive expensive surgeries and treatments done in India owing to high medical expertise coupled with lower cost of quality medicines significantly boosting avenues for medical tourism.
During December 2019, on a moving annual total (MAT) basis, industry growth was at 9.8 %, price growth was at 5.3 %, new product growth was at 2.7 %, and volume growth was at 2 % y-o-y.
Indian drugs have a very diverse global market, catering to more than 200 countries in the world, with the prime market being the US . India is the largest provider of generic medicines globally in terms of volume, accounting for 20% of the global export with potential to rise further in the future. Pharma exports from India, which include bulk drugs, intermediates, drug formulations, biologicals, Ayush & herbal products and surgicals reached US$ 13.69 billion in FY20 (till January 2020). The export is expected to reach US$ 20 billion by end of 2020.
Medical devices industry in India has been growing 15.2 % annually and is expected to reach US$ 8.16 billion by end of 2020 and US$ 25 billion by 2025. Another key economic growth aspect include rise in affordable medicines under the Pradhan Mantri Bhartiya Janaushadhi Pariyojana (PMBJP) which achieved a record sales turnover of Rs 52 crore (US$ 7.38 million) in the month of April 2020.
The ‘Pharma Vision 2020’ by the government’s Department of Pharmaceuticals which primarily aims to make India a major hub for end-to-end drug discovery, received cumulative Foreign Direct Investment (FDI) worth US$ 16.39 billion between April 2000 and December 2019.
Under the Union Budget 2020-21, allocation to the Ministry of Health and Family Welfare stands at Rs 65,012 crore (US$ 9.30 billion), whereas, Rs 6,429 crore (US$ 919 million) has been allocated to health insurance scheme, Ayushman Bharat – Pradhan Mantri Jan Arogya Yojana (AB-PMJAY). In November 2019, the cabinet approved the extension/renewal of extant Pharmaceuticals Purchase Policy (PPP) with the same terms and conditions, while adding one additional product, namely Alcoholic Hand Disinfectant (AHD), to the existing list of 103 medicines till the final closure/strategic disinvestment of pharma CPSUs.
The Government expenditure on healthcare increased to Rs 3.24 lakh crore (US$ 45.96 billion) in FY20, growing at a CAGR of 18 % from FY16. As per the Economic Survey 2019-20, the government expenditure (as a % of GDP) increased to 1.6 % in FY20 from 1.2 % in FY15 for health. FDI increased to 74 % in existing pharmaceutical companies and 100 % in new projects.
India plans to set up a nearly Rs 1 lakh crore (US$ 1.3 billion) fund to provide a boost to companies to manufacture pharmaceutical ingredients domestically by 2023.
The Pharma sector has recently been corrected and many investors are bullish on stocks like Sun Pharma, Lupin, Dr Reddy’s Laboratories, Aurobindo Pharma and Divi’s Laboratories to name a few.
Long story short, Pharmaceutical Sector is currently abuzz in the Indian market, and the Government is betting on it for the next 10 years, and even investing novices can figure it out.
Now comes the million dollar question: We know Pharmaceutical sector is booming and will mostly go nuclear in the coming years, but which companies should we bet on? Well, here at Stocks Khareedo, we’ll recommend you what we think are the best bets.
Yes, there are implications of Covid-19 and the general uncertainty of the business currently (like every sector in the whole goddamn world), but we believe these pharma companies’ a worthy investment.
1. Sun Pharma
With a market cap of Rs. 1.189 billion, Sun Pharma is easily a safe bet for conservative investors seeking to invest in this sector for long term. Currently trading at a price of Rs.495.6, there is a strong bullish call on the stock at Rs. 540 predominantly due to Sun Pharma’s EBITDA contribution of specialty likely to rise by 15 % from nil by FY22 while specialty business in US comprising of nine products is at an in-flexion point. It is also estimated that Sun Pharma will witness 32 % rise in CAGR to USD 675 million over FY20-22.
It is expected that the drug firm’s strong execution of specialty portfolio could drive a PE re-rating.
|P/E: 36.55||Industry P/E: 30.76|
|Book Value (Rs): 101.68||Price/ Book: 4.81|
|Dividend (%): 400||Dividend Yield: 0.82|
For a better understanding, considering the SWOT Analysis of the company,
- The company has been successful in increasing its revenues for the past 2 quarters.
- The Book Value per share has been on a rise, improving for the last 2 years, signalling a potentially undervalued stock with an expected rise in near future.
- A key recommendation reason is that the company is in a low debt with a decreasing promoter pledge.
- Besides being listed in the Nifty-50 Index companies, it is a top Indian exporter in an exporting dominant sector expected to further grow significantly in the near future.
- There is a growth in the Operating Profit with an increase in operating margins (YoY). (Operating profit is the profitability of the business, before taking into account interest and taxes).
- There is a declining Net Profit (QoQ) and (YoY). In simpler terms, the net income of the company is dwindling. (Net income is the profit of a company after deducting all operating expenses, all other charges including taxes, interest and depreciation have been deducted from total revenue.)
- There is a decline in Net Cash Flows i.e. the company is unable to generate cash.
- The profits for the past 3 quarters has been declining.
- The company has generated a 8.4% return on Nifty 500 is just over the last 4 months.
- The company has generated a 319.5% return on Nifty 500 over the last 5 years.
- The Promoters have increased their shareholding in the company.
- The current share price is near a 52-week high of Rs.512 which may be deemed on the expensive end.
Another strong contender to generate profits and take advantage of the most recent correction in the pharma sector is Lupin. Lupin has a market cap of Rs. 420.784 Billion and is currently being traded at the lower end since its past 5-year share average.
|Total Revenue: 173,039,500||Cash flow from operations: 16,659,700|
|Operating Income or Loss: 17,950,600||Cash flow from investments: -32,824,700|
|Net Income: -3,694,600||Price to book: 3.05|
Having a closer look at the SWOT analysis of the company.
- The Company has zero promoter pledge.
- The Book Value per share has been improving for the last 2 years.
- Lupin is a company which has displayed bullish engulfing pattern (i.e. A bullish reversal signalling high reliability; as buyers are in control).
- There is a growth in the Net Profit with increasing Profit Margin (QoQ).
- A stock where mutual funds have increased holdings in the Covid-19 period.
- There is a declining Cash flow from Operations for the last 2 years as poor cash is generated from core business.
- There is a degrowth in Revenue and Profit.
- Lupin is a company with weak financials.
- Lupin is a company with a 10% increase in share price over the last 3 months, with rising net profit growth.
- Lupin is a turnaround company- loss to profit in QoQ.
- Lupin is a stock with a low PE (PE<=10).
- It has generated a 320% returns on Nifty 500 over the past 5 years.
- There is an increasing trend in non-core income with a negative growth.
- Lupin recently received a warning letter from the USA FDA.
- Lupin is a company which has faced a brunt of impact due to Covid-19.
In conclusion, it can be easily established that pharma sector is here for the boom and we recommend our readers to ride this pharma wave and buy Sun Pharma and Lupin with a 5 year investment horizon.