Pharma stocks were darling of market during covid-19 times, during vivid when majority of stocks were falling like there’s no tomorrow, pharma stocks were the one going up but as covid pandemic receded they started falling due to various reasons. What were these reasons and is this the right time to pick pharma stocks in one’s portfolio, let’s discuss.
Pharma sector a brief introduction
India is called the pharma capital of world, we have plethora of listed pharma companies catering variety of segments. The total annual turnover of Pharmaceuticals in the fiscal year 2021-22 was $ 42.34 Bn. Major segments of Indian Pharmaceutical Industry include generic drugs, OTC medicines, bulk drugs, vaccines, contract research & manufacturing, biosimilars and biologics. India is a global leader in the supply of DPT, BCG, and Measles vaccines.
The nation is the largest provider of generic medicines globally, occupying a 20% share in global supply by volume, and is the leading vaccine manufacturer globally. India also has the highest number of US-FDA compliant Pharma plants outside of USA and is home to more than 3,000 pharma companies with a strong network of over 10,500 manufacturing facilities as well as a highly skilled resource pool.
The pharmaceutical industry in India is expected to reach $65 Bn by 2024 and to $130 Bn by 2030.(all data from govt. sources)
Pharma stocks have global linkages and there most of the business comes from US, Europe. As covid peaked prices of the medicines were too high so some governments in developed market put a cap on price at the same time raw material costs were riding due to covid in China(a major supplier of APIs and other raw materials) and added supply constraints for various reason. But due to cap on price companies were not able to pass on the price to end users.
After this inflation became major concern for world and to tackle this central banks around the globe started raising interest rates, recession talks in developed economies increased risks for export oriented pharma companies. Also due to covid a lot of USFDA inspections were pending as there were restrictions on movement. Due to these ‘headwinds’ pharma sector lost its premium as profit and margins were severely affected.
Most of these headwinds are easing so the question is can pharma stocks re-gain their lost MOJO after months of underperformance?
Top Large-cap pharma stock picks from experts
I am curating a list of large pharma stocks with upside potential of more than 30-40% in long term after placing several screeners at the place. Experts/ analysts from different brokerages have given positive views/ targets in these stocks.
| Stock name (cmp) | P/E ratio | 5y p/e range | PEG Ratio | ROE (%) | 5y profit CAGR(%) | Div–yield(%) | All time high | |
| Sun Pharma (999.6) | 28 | 34-500 | 0.2 | 16.6 | 26 | 1 | 1072 | |
| Cipla (966) | 26.7 | 16-52 | 2.2 | 18.8 | 17 | 0.88 | 1185 | |
| Biocon (240) | 47.1 | 11-600 | -2.2 | 5% | 13 | 0.62 | 488 | |
| Divi’s lab (3512) | 51.1 | 31-66 | -1.3 | 14.9 | 16 | 0.85 | 5425 | |
| Dr.Reddys lab (4610) | 17 | 18-58 | 0.2 | 20 | 38 | 0.87 | 5615 | |
| Torrent Pharma (1777) | 48.3 | 32-56 | 0.8 | 20.5 | 14 | 1.24 | 1890 | |
| Lupin (816) | 86.25 | 25-250 | 0.7 | 3.49 | 9 | 0.49 | 1912 | |
| Zydus lifesciences (518) | 22.7 | 18-65 | -0.5 | 13.8 | 6 | 1.2 | 560 |
FM preferred pick among large caps
Sun Pharmaceuticals India’s largest pharma company by market cap having 8.2% market share(domestically FY21) of Sun pharma has been one of the consistent compounder. It’s revenue comes from country/region Indian wise- Indian branded generics(31%), US business (30% of revenues), Emerging markets(18%), Rest of the world(15% of revenue), API business (6% of total revenue company generates selling API’s across the world).
FM swot analysis for Sun Pharma
| Strength | Weakness | Opportunities | Threat |
| Strong annual EPS growth | Co.’s net cash flow is declining | Management is confident enough to achieve growth in all segment | USFDA approvals needed frequntly |
| Co delivering good profit of 26.5%CAGR over last 5 year | Sales growth of 10% from past 5 year is mediocre | The company is gaining market share both in India and abroad | Negative observations from USFDA may dent the performance |
| Institutional holders, Fii, Dii, increasing Shareholding | Decline in net profit with falling profit margin(q-o-q) | Co’s specialty portfolio is in strong momentum. | |
| Co with very low debt | Promoter have pledged 1.78% of their total holding | Lot of new product launches in pipeline. | |
| ROE, ROA improving with increasing profit margin from past 2 year | Companies current p/e us less than 3, 5, 10 year p/e | ||
| Bullish momentum- stock above short, medium and long term moving average | |||
| Analysts bullish, 54 buy calls, 0 hold and sell call |
Dr Reddys laboratory (market cap 76,777crore) CMP 4604 is a leading Indian pharmaceutical company that mainly operates in Active pharmaceutical ingredients(API), custom pharmaceutical services(CPS), generics, biosimilars and differentiated formulations product categories. Company has more than 400 high quality generic drugs in different categories.
For Dr. Reddys main revenue contributor in generic segment are nervous system drugs (14%), gastrointestinal (13%) & anti-infective drugs (10%). The company is one of the largest API manufacturers in the world, it works with several leading generic formulator companies to help them bringing their molecules first to the market. This also helps company’s generic business to bring down its cost and faster migration of its products to market.
Unlike other pharma stocks Dr Reddys revenue comes from several different geographies, In FY22, USA accounted for 37% of revenues, followed by India (22%), Russia (9%), and others (32%). Company have 9 R&D facilities situated in different geographies including India, Netherland, Malaysia etc. Company R&D expense as a percent of total revenue came down from 13% in FY18 to 8% in FY22. Higher R&D expense as % of total revenue indicate company is spending good sum of revenue on research and is a bad sign for stock price performance( primary reason behind Warren Buffet avoiding pharma stock due to higher R&D cost involved to stay in business)
FM swot analysis for Dr. Reddys
| Strength | Weakness | Opportunities | Threat |
| Constant growth in Revenue | Decline in generated net cash flow | New product launches in India, China, US | Intensification of competition in US and Indian market |
| Excellent profit growth CAGR of 38% over past 5 year | Inconsistent ROCE | Attractive valuation | |
| Company has significantly reduced it’s debt, it is almost debt free | Slow growth in US business | Current TTM PE is less than 3,5 and 10 year PE | |
| Well diversified product portfolio across geographies. | |||
| Company with improving gross, operating and net profit margin | |||
| Institutional investors are increasing their shareholding. | |||
| Brokerages are bullish, 30 buy call, 0 hold call, 0 sell call. |
Preferred Mid and Small cap pharma stocks
Experts are of view that mid and small cap can outperform larger Peers if chosen wisely. Mid and small cap pharma stocks have corrected harshly after making a high in 2021. Many mid and small caps are trading below their fair value, so here I am putting a list of such stocks to help you in your search.
| Stock Name (cmp) | PE ratio | 5y PE Range | PEG Ratio | ROE (%) | 5y profit CAGR(%) | Div-yield (%) | All time High |
| Natco Pharma (620) | 15.8 | 16-124 | 0.04 | 15 | 1 | 0.88 | 1189 |
| Lupin (822) | 86.9 | 25-271 | 0.7 | 3.45 | 9 | 0.49 | 2108 |
| Ajanta Pharma (1411) | 31 | 22-32 | -1.7 | 17.7 | 5 | 0.51 | 1631 |
| Piramal Pharma (87.2) | – | 125-215 | 0.4 | -2.76 | – | 0.0 | 200 |
| Granules (282) | 14 | 10-25 | 0.5 | 19.1 | 31 | 0.5 | 438 |
| Caplin Point lab (774.15) | 15.6 | 14-41 | 0.6 | 22.4 | 21 | 0.53 | 1035 |
| Jubilant Pharmova (340) | – | 31-122 | 0.8 | -3.32 | – | 1.5 | 1047 |
| supriya life sciences (258) | 23 | 21-32 | -0.6 | 13.7 | 59 | 0.23 | 602 |
| Marksans Pharma (89.55) | 15 | 19-58 | 0.4 | 18.6 | 52 | 0.6 | 107 |
| RPG life sciences (796) | 19.4 | 15-55 | 0.6 | 24 | 38 | 1.2 | 1012 |
| Solara active pharma (352) | – | 9-169 | -0.9 | -1.47 | – | – | 1860 |
| Lincoln Pharma (375.35) | 10.3 | 6-13 | – | 15.6 | 16 | 0.4 | 456 |
| Anuh Pharma (89.7) | 12.4 | 13-48 | – | 16 | 21 | 2.33 | 219 |
FM preferred pick among mid/small cap
Natco pharma CMP 620(market cap 11,324 crore) has it’s presence in all three major segments e.g. finished dosage formulations (FDF), active pharmaceutical ingredients (APIs), Contract Manufacturing Business(CMB). With a mission “to make specialty medicines accessible to all” incorporated in 1981 Natco Pharma Limited is a vertically integrated and R&D focused pharmaceutical company.
Company is focused on high-barrier-to-entry products that are typically characterized by one or more of the following: Intricate Chemistry, Challenging delivery systems, Difficult or complex manufacturing process. Vertical integration for several APIs a key competitive advantage. Company has six FDF, 3 APIs manufacturing facilities and two crop science health unit.
It recently forayed in crop health business with Completing state-of-the-art greenfield manufacturing facilities for agro-chemical and formulation products, with a total Capex spend of over INR 150 crores located in Nellore, AP targeting two categories of products – bioproducts and pesticides.
FM SWOT analysis for Natco Pharma
| Strength | Weakness | Opportunities | Threats |
| Strong niche product portfolio with tough to entry segments, competitive advantage. | Subdued sales growth of 4.5% from past 5 years | Undervalued growth stock | Increasing R&D expense |
| Company reduced debt significantly becoming almost debt free | PE ratio less than 3,5 and 10 year average PE | ||
| Stock passes majority of CANSLIM investment criteria | Improving overall macro for such companies | ||
| Strong annual EPS growth rate | High Piotroski score, company with strong financials | ||
| Increasing revenue and profit from last 2 quarter, improvement in margin | High volume, high gain, improving delivery percentage | ||
| Institutions increasing their shareholding | |||
| Improving cash flow from past 2 years |
Caplin point labs CMP 777(market cap: 5900 crore) with a wide portfolio of 4000+ pharma products, 650+ formulations and 26 therapeutic segments company is well placed and have one of the biggest diversified product portfolio among pharma stocks. It has minimal reliance for revenues on a single product/ therapeutic segment. Geography wise revenue breakup Latin America-87%, USA- 8%, Africa- 5%, while segment wise generics- 75%, branded generics- 25%. These revenue comes from three Channel, distribution- 60%, pharmacy sales- 20%, tender business- 20%.
FM SWOT analysis for Caplin point labs
| Strength | Weakness | Opportunities | Threats |
| Growth in net profit with improving profit margin, profit growth of 21.3% CAGR over last 5 years. | Mutual fund reduced holding last quarter from 1.04% to 0.57% | Growth stocks available at attractive valuation, available at low PE among peer pharma stocks | To much dependence on Latin America, 87% of revenue comes from there, any unforeseen event can impact revenue significantly |
| Consistency in improving EPS, BVPS (book value), sales growth is 23% over last 10 years. | RoCE, ROA declining from last 2yr | Company works on asset lite model, outsourcing 60% products from outside | Latin America a easy entry, less regulated market so more competition |
| Company is debt free | Majority of sales comes from Latin America, a semi regulated market with easy entry | Increasing R&D expenses, from 1.3% in fy14 to ~10% in fy20 | |
| Promoters have increased holding from 68.80% to 70.66% in March 2023 qtr | Foraying into more regulated market like America to diversify | ||
| FPI have increased holding from 2.24% to 2.36% | Capability of forward and backward integration | ||
| Strong cash generating capacity from core business, improving cash flow from past 2 years | Aggressive expansion plans | ||
| Diversified product portfolio | Bullish brokerage reports, raised target after q4 results. |
Bonus- can Piramal and Marksans be the dark horse among pharma stocks?
A part of Piramal group of companies, Piramal pharma was demerged from Piramal Enterprises and got listed on the bourses in October last year. Though stock corrected sharply after listing but took support and reversed after touching ₹63(52-week low). Brokerages are bullish on Piramal pharma and believe it is available at steep discount to other pharma stocks. Jefferies published a report, ” night is darkest before the dawn” on Piramal Pharma.
Marksans Pharma is growing very fast among Peers, has a profit growth CAGR of over 50% from last 5 years, sales growth of 15% is impressive and have maintained it’s performance even in such challenging time. Experts describe Marksans as “growth at reasonable price” stock. It has already provided a bumper return of 234% over last 5 year but experts believe can continue to reward shareholders if held patiently.
Know about best dividend paying stocks here
Disclaimer- none of the above given stocks are for recommendations purpose, please contact your Investment Advisor before making any investment decision.
