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Top stock ideas by CLSA in pharma sector after Q1 results

Updated : 2019-10-22 08:28:40

Indian pharmaceutical companies reported positive growth in the Indian business in the quarter ended June 30. Barring Cipla that was impacted due to restructuring in its trade generics segment, most companies have shown 8-9 percent growth. While growth is strong for multinationals, the street is cautious. Headwinds such as adverse impact of companies offering generic drugs and Jan Aushadhi initiative by the government do pose a risk. Here are the top stock recommendation from global brokerage CLSA in the pharma sector:

<strong>Sun Pharma (Buy | TP: Rs 540):</strong> Sun kick-started FY20 on a strong note, with 1QFY20 PAT rising 41 percent (27 percent beat). With steps being taken to improve governance, investor focus will be on the ramp-up of its specialty pipeline in 2HFY20 and strong execution could drive a re-rating. Maintain FY20-22 EPS estimates but raise target price from Rs520 to Rs540. (Image: Reuters)
Sun Pharma (Buy | TP: Rs 540): Sun kick-started FY20 on a strong note, with 1QFY20 PAT rising 41 percent (27 percent beat). With steps being taken to improve governance, investor focus will be on the ramp-up of its specialty pipeline in 2HFY20 and strong execution could drive a re-rating. Maintain FY20-22 EPS estimates but raise target price from Rs520 to Rs540. (Image: Reuters)
<strong>Dr Lal PathLabs (Buy | TP: Rs 1,330)</strong>: Q1 results were largely in-line with estimates, with yet another quarter of strong volume growth. Overall, volume remains the single point of focus, which is helping the company expand into tier-II/IIItowns; it is adopting a city-specific approach for west and south India and thereby reducing dependence on its home market of Delhi/NCR. We largely retain our FY20-21CL EPS estimates, but increase our TP to Rs 1,330 (was Rs1,320). (Image: Company)
Dr Lal PathLabs (Buy | TP: Rs 1,330): Q1 results were largely in-line with estimates, with yet another quarter of strong volume growth. Overall, volume remains the single point of focus, which is helping the company expand into tier-II/IIItowns; it is adopting a city-specific approach for west and south India and thereby reducing dependence on its home market of Delhi/NCR. We largely retain our FY20-21CL EPS estimates, but increase our TP to Rs 1,330 (was Rs1,320). (Image: Company)
<strong>Ipca Labs (Sell | TP: Rs 810) </strong>All businesses except institutional malaria performed strongly, keeping Ipca on track to achieve revenue and margin guidance for FY20. Operating leverage benefit should continue in FY20 but we expect increased capex as capacities reach optimum utilization and negate this benefit. Ipca’s punchy valuation of 22/19x FY20/21CL leaves limited room for negative earnings growth surprises along with any delay in US resolution. (Image: Company)
Ipca Labs (Sell | TP: Rs 810) All businesses except institutional malaria performed strongly, keeping Ipca on track to achieve revenue and margin guidance for FY20. Operating leverage benefit should continue in FY20 but we expect increased capex as capacities reach optimum utilization and negate this benefit. Ipca’s punchy valuation of 22/19x FY20/21CL leaves limited room for negative earnings growth surprises along with any delay in US resolution. (Image: Company)
<strong>Glenmark Pharma (Sell | TP: Rs 350)</strong>:  Glenmark believes two limited-competition launches in 2Q should revive US growth but guidance of 5-10 percent growth is not encouraging. Net debt increased Rs1.2bn QoQ and any large debt reduction hinges on the divestment of its API business/non-core assets. CLSA cut FY20-21 EPS by 15-18 percent as weak revenue growth along with a high R&D spend phase should keep margin subdued. (Image: Company)
Glenmark Pharma (Sell | TP: Rs 350):  Glenmark believes two limited-competition launches in 2Q should revive US growth but guidance of 5-10 percent growth is not encouraging. Net debt increased Rs1.2bn QoQ and any large debt reduction hinges on the divestment of its API business/non-core assets. CLSA cut FY20-21 EPS by 15-18 percent as weak revenue growth along with a high R&D spend phase should keep margin subdued. (Image: Company)
<strong>Cadila Healthcare (Buy | TP: Rs 285):</strong> Q1 results were below estimates despite adjusting for a Rs700 m ‘one-off’ charge. India positioning is being strengthened by cutting down on tail brands in branded generics and scaling up its consumer health portfolio. Complex generics, biologics/vaccines for EMs and novel research projects are long-term drivers. CLSA cut FY20-21CL EPS by 8-14 percent on lower margin and higher depreciation assumptions but upgraded the stock to BUY from SELL. Concerns related to the Moraiya plant issues have played out and long-term drivers look encouraging. (Image: Company)
Cadila Healthcare (Buy | TP: Rs 285): Q1 results were below estimates despite adjusting for a Rs700 m ‘one-off’ charge. India positioning is being strengthened by cutting down on tail brands in branded generics and scaling up its consumer health portfolio. Complex generics, biologics/vaccines for EMs and novel research projects are long-term drivers. CLSA cut FY20-21CL EPS by 8-14 percent on lower margin and higher depreciation assumptions but upgraded the stock to BUY from SELL. Concerns related to the Moraiya plant issues have played out and long-term drivers look encouraging. (Image: Company)
<strong>Lupin (Sell | Rs 660):</strong> Lupin reported in-line revenues in 1QFY20, but lower R&D spend and other expenses drove an 18 percent beat on Ebitda and PAT. Complex product launches such as gProAir for US and bEnbrel for EU have seen further delays. CLSA cut FY21-22CL EPS by 11-12 percent as continued delays in critical approvals/weak Solosec ramp-up could drive further earnings cuts. (Image: Reuters)
Lupin (Sell | Rs 660): Lupin reported in-line revenues in 1QFY20, but lower R&D spend and other expenses drove an 18 percent beat on Ebitda and PAT. Complex product launches such as gProAir for US and bEnbrel for EU have seen further delays. CLSA cut FY21-22CL EPS by 11-12 percent as continued delays in critical approvals/weak Solosec ramp-up could drive further earnings cuts. (Image: Reuters)
<strong>Aurobindo Pharma (Buy | Rs 800):</strong> Sandoz acquisition closure (likely very soon) and subsequent synergy benefits are key catalysts which have the potential to increase FY21 EPS by 10 percent. CLSA cut FY20-21CL EPS by 5-6 percent mainly due to higher depreciation/amortisation cost from recent acquisitions. This pulls down our TP to Rs800 (from Rs830) based on 16x June-21 EPS. (Image: Company)
Aurobindo Pharma (Buy | Rs 800): Sandoz acquisition closure (likely very soon) and subsequent synergy benefits are key catalysts which have the potential to increase FY21 EPS by 10 percent. CLSA cut FY20-21CL EPS by 5-6 percent mainly due to higher depreciation/amortisation cost from recent acquisitions. This pulls down our TP to Rs800 (from Rs830) based on 16x June-21 EPS. (Image: Company)
<strong>Cipla</strong> <strong>(Sell | TP: Rs 460)</strong>: A subdued 1QFY20, blighted with several one-offs. The negative surprise was a 12 percent YoY decline in India sales as Cipla realigned distributors in trade generic business (23% of sales in FY19) with sales expected to normalise only by 3QFY20. No big launches in the US in the near term should keep growth outlook muted unless limited competition drug gProventil gets an approval by FY21. CLSA cut our FY20-22 EPS estimate by 9-14 percent factoring lower growth in India and EMs. Cipla’s quarterly earnings trajectory has been quite volatile which makes it difficult to justify premium PE valuations relative to its history and stock also lacks near-term catalysts.. (Image: Reuters)
Cipla (Sell | TP: Rs 460): A subdued 1QFY20, blighted with several one-offs. The negative surprise was a 12 percent YoY decline in India sales as Cipla realigned distributors in trade generic business (23% of sales in FY19) with sales expected to normalise only by 3QFY20. No big launches in the US in the near term should keep growth outlook muted unless limited competition drug gProventil gets an approval by FY21. CLSA cut our FY20-22 EPS estimate by 9-14 percent factoring lower growth in India and EMs. Cipla’s quarterly earnings trajectory has been quite volatile which makes it difficult to justify premium PE valuations relative to its history and stock also lacks near-term catalysts.. (Image: Reuters)
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