Best Pharma Stocks To Buy Now (ICICI-Direct Research Report)

Pharma stocks poised for re-rating amid panic…

Amid Covid-19 pandemic panic that has taken a heavy toll on most sectors in the Indian markets, most pharma companies withstood the carnage while some, in fact, delivered positive returns during this period. Most sectors continued to suffer on account of unprecedented lockdowns and limited business continuity plans (BCPs) besides a bleak demand outlook.

The cases of Covid-19 are still increasing with significant velocity in many parts of the world. There is significant uncertainty as to when things will normalise. However, in pharma, barring few supply related disturbances, we do not envisage material earnings impact in FY21.

Also, note that in this unprecedented global lockdown, pharma and healthcare services, being at the top layer of essential services, remain exempted everywhere. Now that Chinese supply lines for key starting materials (KSM) and APIs are crawling back to normal, the supply side issues are slowly waning. Overall, we expect hindrances to persist for the next two to three months only with full normalcy from Q2FY21 onwards.

Our FY21 earnings estimates for I-direct coverage universe are unlikely to change materially as will be FY22 estimates as there is no change in visibility aspect.

However, we expect a multiple re-rating in some stocks, especially for those with 1) stable earnings visibility, 2) no balance sheet stress and strong return ratios, 3) having strong presence in some critical segments, besides 4) decent ESG quotient.

On the business front, despite the nationwide lockdown, domestic growth is expected to remain more or less stable. Exports growth, barring for one or two months due to congestion in all major ports globally, is also expected to remain strong due to 1) currency benefit, 2) slowdown in competition due to delay in new approvals that will be beneficial for existing players and 3) expected demand continuum across the world despite Covid-19.

Some windfall is also expected in some critical products- a case in point is Hydroxychloroquine, a malaria drug that is likely to be repurposed as a prophylaxis for Covid-19 treatment in some cases. Profitability is also likely to improve due to cooling off of raw material prices (crude based solvents) and continuous focus on cost rationalisation and MR productivity.

Improving operating leverage is also likely to contribute to margin expansion. The companies are also moderating their capex plans to focus on better RoCE.