Domestic formulations sector: secular growth stories
The India Pharma Market (IPM) has maintained a steady ~10% CAGR from FY12 to FY23, despite various disruptions, driven mainly by volume expansion ranging between 5-10% during FY12-18, which subsequently tapered to 2-3% from FY19-23, primarily due to generic competition (FY22 growth was on a low base due to the COVID-19 pandemic). However, this deceleration in volume growth has been somewhat offset by 5-6% price growth annually, since FY19. We expect IPM growth to remain steady at 8-10% over the next few years, with companies boasting strong franchises and brands likely to see faster growth. This growth trajectory will be propelled by (1) continued price growth of 4-5%, (2) gradual volume growth and recovery in the acute segment, and (3) launches of new products. Similarly, leading companies are poised to surpass the IPM through strategies like M&As, expanding field forces, and new launches. We like domestically-focused companies due to their strong pricing power, better margins, and healthy cash reserves/RoCEs, which have led to a recent rerating among domestic peers. We consider the volume recovery in the IPM as a crucial earnings driver, essential for sustaining a premium over the Nifty index. Without it, additional earnings upgrades are unlikely. In light of these factors, we are initiating coverage with a BUY rating for ERIS (TP of INR 1,070) and an ADD rating for ALKEM (TP of INR 5,520), MANKIND (TP of INR 2,360), and TRP (TP of INR 2,970).
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