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The Baseline
31 Oct 2022
Five analyst picks from pharma and chemicals
By Suhas Reddy

This week we look at analyst picks from the Pharmaceutical and Chemicals & Petrochemicals sectors.

  1. Granules India: ICICI Direct maintains its ‘Buy’ rating on this pharmaceutical company with a target price of Rs 410, implying an upside of 10.0%. In Q2FY23, the firm’s net profit rose 79.8% YoY and revenue, 29.5% YoY. Analysts Siddhant Khandekar and Utkarsh Jain say Granules’ revenue growth in this quarter has beaten their estimates, mainly driven by higher paracetamol sales in the US, increased market share and new launches. They added that the company’s EBITDA margins also beat their estimates. It grew by 409 bps YoY to 21.1%. 

Khandekar and Jain believe that the company’s margin will improve in the coming quarters on the back of a focus on economies of scale and gradual expansion of complex products. Overall, they are positive about the company’s prospects, given its focus on product portfolio diversification, improving backward integration, and cost management. The analysts expect the firm’s net profit to grow at a CAGR of 27.8% over FY22-24.

  1. Glenmark Life Sciences: BoB Capital Markets keeps its ‘Buy’ rating on this active pharmaceutical ingredient (API) manufacturer but reduces the target price to Rs 535 from Rs 560. This implies an upside of 25.9%. Analyst Saad Shaikh reduces the target price on the expectation of higher costs to commission the new plant in Dahej and a fall in the firm’s Q2FY23 revenue. GLS’ revenue fell on the back of a 33% YoY reduction in API business from its  parent company Glenmark Pharmaceuticals, the analyst noted.

However, Shaikh remains positive about the company’s growth prospects for its “strong market position in key APIs and focus on product value over volumes, which translates to a superior margin profile”. He also believes that an increase in production capacity will benefit the company in the medium to long term. The analyst expects the company’s net profit to grow at a CAGR of 9.8% over FY22-25.

  1. Torrent Pharmaceuticals: ICICI Securities maintains its ‘Buy’ rating on this pharmaceutical company and increases its target price to Rs 1,853 from Rs 1,769. This indicates a 12.3% upside. Analysts Vinay Bafna and Rohan John say that the firm’s Q2FY23 revenue and EBITDA margin growth was broadly in line with their estimates. But then, its profit growth came in below estimates. They attribute this to higher other expenses and lower other income. Despite its profit growth missing their estimates, the analysts remain positive on Torrent Pharma, considering “its strong branded franchise supported by a dominant chronic segment in India and Brazil”.

Bafna and John believe that the company’s recent acquisition of Curatio will augur well for it, despite the acquisition diluting the earnings per share in the near term. They also expect the firm’s operational leverage, cost optimisation, and resolution of its plants will drive margin growth in the coming quarters. The analysts estimate Torrent Pharma’s net profit to grow at a CAGR of 35.5% over FY22-25.

  1. UPL: Prabhudas Lilladher maintains a ‘Buy’ call on this agrochemical manufacturer with a target price of Rs 1,020. This indicates an upside of 39.7%. UPL has announced a strategic realignment of its businesses into four distinct business verticals. Himanshu Binani remains optimistic about the company on the back of this business restructuring strategy. 

Marquee investors like ADIA, TPG, Brookfield, and KKR are investing a total of $500 million in UPL. But ADIA and TPG will receive $241 million for their exit from non-crop protection in UPL Corp business resulting in net proceeds of $259 million. Binani believes that these net proceeds are likely to be utilized towards debt reduction and working capital requirement and would not meaningfully impact the earnings profile in the near term. “In terms of unlocking the fair value of each of the business segments, It will be a positive move in the long term,” he added.

  1. Navin Fluorine International: Edelweiss maintains a ‘Buy’ call on this commodity chemicals company with a target price of Rs 5,500, indicating an upside of 20.8%. In Q2FY23, the company’s profit decreased 8.6% YoY to Rs 57.8 crore, despite a 23.1% YoY increase in revenue to Rs 430.1 crore. Analysts T Ranvir Singh, Nikhil Shetty, and Prasad Hase said, “Navin Fluorine International’s Q2FY23 performance was below our estimates and street expectations on the revenue and bottom-line front.” 

Despite the lower-than-expected results, the analysts remain positive on the chemicals manufacturer on the back of strong hydrofluoroolefin demand, commercialization of phase one multi-product plant, robust demand outlook, ability to pass on price hikes, and healthy realizations across specialty chemical products. “The company’s long-term story is intact and we expect new capacity additions to drive top-line growth while gaining leverage after achieving optimum capacity utilization to improve profitability,” they concluded.

Note: These recommendations are from various analysts and are not recommendations by Trendlyne.

(You can find all analyst picks here)

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