Sun Pharma, Lupin, Torrent preferred pharma picks: Sharekhan

India's pharmaceutical industry reported a 31.3 percent YoY growth in net sales during the fourth quarter of FY12, according to a Sharekhan report.

By ET Online | Updated: Jun 08, 2012, 03.25 PM IST

NEW DELHI: India's pharmaceutical industry reported a 31.3 percent YoY growth in net sales during the fourth quarter of FY12, according to a Sharekhan report.

“The growth was mainly driven by export of formulations which grew by 34.8 percent YoY on a weaker currency, launch of key products in the US and acquisition-led volumes growth for a few,” the brokerage added.

Sharekhan's top picks among pharmas are Sun Pharma, Lupin, Torrent Pharma, Ipca Labs and Divi’s Laboratories.

The growth rate for the domestic pharmaceutical market is set to rise over the medium term, according to a research report.

“The revenue CAGR over the past three years has been 12.4 percent, but it is expected to be up at 15.3 percent from FY12 to FY14," Barclays Capital Equity Research said in its report.

“The pricing environment in the Indian market has been a favourable one, and past growth has in part been driven by price increases of 2-4 percent annually,” the report added.

Operating profit margin (OPM) of most pharmas stood at 24.3 percent (up 434 basis points YoY) mainly due to favourable currency movement and a better operating performance.

The rupee has so far depreciated nearly 5 percent in the June 2012 quarter, compared with its average level in the prior quarter.

“The Indian currency has been appreciating due to dollar weakness overseas but it is seeing only a correction. The market seems to have strong support of 54.80 and 54.50 levels,” according to a report by India Forex Advisors.

“During the quarter, most of the players in the pharma space either reversed their mark-to-market provisions for forex losses made in Q3FY2012 to square off the year-end provisions or reduced their forex losses (non-cash),” the Sharekhan report added.

These provisions collectively resulted in forex gains of Rs 86 crore for our universe. Players like Primal Healthcare provided forex gains of Rs 72 crore, while Glenmark Pharma provided forex gains of Rs 35 crore during the quarter.

The brokerage is of the view that despite an improvement in operating margins, adjusted net profits, excluding forex and exceptional items of most pharmas, could see a Y-o-Y growth of 30.5 percent in Q4FY2012, mainly due to higher tax provisions for few and higher fixed costs for others.

Valuations:

1) Cadila Healthcare is a ‘hold’ call with a price target Rs 767.

The stock is currently trading at 17x and 13x average earnings for FY2013E and FY2014E. We value the stock at 16x average earning for FY2013E and FY2014E.

2) Divi’s Labs is a ‘buy’ with a price target Rs 1,122.

The stock is trading at 18x and 15x FY2013E and FY2014E earnings. Our price target implies 22x average earnings for FY2013E and FY2014E.

3) Glenmark Pharma is a ‘buy’ with a price target Rs 412.

The stock is currently trading at 15x and 13x FY2013E and FY2014E core earnings, respectively. We maintain our ‘buy’ rating on the stock with a revised price target of Rs 412, which includes Rs 64 from the research pipelines and Rs 349 from the core business.

4) Ipca Laboratories is a ‘buy’ call with a price target Rs 436.

The stock is currently trading at 10x average earnings for FY2013E and FY2014E. Our price target at Rs 436 implies 13x average earnings for FY2013E and FY2014E.

5) Lupin is a ‘buy’ call with a target price Rs 597

The stock is currently trading at 20x and 16x FY2013 and FY2014 estimated earnings. We value the stock at 20x average earnings for FY2013E and FY2014E.

6) Opto Circuits is a ‘buy’ call with a price target Rs 302.

Our target price implies 12x average earnings for FY2013E and FY2014E. The stock is currently trading at 6x average earnings for FY2013E and FY2014E.

7) Piramal Health is a ‘buy’ call with a price target Rs 516.

Our sum of the parts (SoTP)-based target price includes the value of the pharma business (including pharma solutions, critical care and the OTC business) at Rs 206 which is 14x FY2014E earnings per share (EPS), the newly acquired Decision Resource Group (DRG) at Rs 34.8 (10x FY2014E EPS), the financial services business at Rs 19 (on the basis of current price to book value [BV], and the research and development [R&D] business at Rs 40 considering there being only two projects (BSR-CarGel and the molecular imagining portfolio) on the basis of discounted cash flow (DCF). Besides, we consider discounted value of cash in hand and liquid investments at Rs 216.

8) Sun Pharma is a ‘buy’ call with a price target Rs 651

We value Sun Pharma at 23x FY2014E earnings. The stock is currently trading at 21x FY2014E earnings.

9)Torrent Pharma is a ‘buy’ call with a price target Rs 760:

The stock is trading at 11x average earnings of FY2013E and FY2014E. We maintain our price target at Rs 760, which is 14x average earnings for FY2013E and FY2014E.

Disclaimer:

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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