The fireworks were soggy for Indian markets in the new year. In the first 15 days of 2025, the Nifty 50 slipped into correction territory, down over 10% from its highs, while the Indian rupee tumbled to a record low, breaching 86 against the US dollar.
According to Bloomberg, the mood will be muted this earnings season as well, as Q3FY25 results could bring a flurry of downgrades.
Pictet Asset Management portfolio manager Prashant Kothari, who oversees about $1 billion in an Indian equity fund, says, “We have had very good economic expansion in India, but there may be clouds on the horizon.” He adds that opportunities in India "are not juicy."
But falling valuations may not be a bad thing, if you know where to look. Warren Buffett loved buying great stocks at discount valuations, and famously said, "Be fearful when others are greedy, and greedy when others are fearful."
One defensive sector that gets interesting in tough times is pharma. Since 2005, the Nifty 50 has delivered an annual negative return three times, but the Nifty Pharma index has outperformed the benchmark index all three times.
So which stocks are looking especially strong ahead of Q3FY25 results? Let’s dive in.
In this week’s Analyticks,
- Indian pharma companies are adapting - and winning - in a changing US market
- Screener: Pharma stocks with high momentum and durability scores, with rising operating profit margin in Q2
US market recovery gives Indian pharma a boost
Indian drug makers have seen booms and busts in the past 15 years, due to their heavy reliance on the US generics business.
The problem with generics? A generic drug contains the same chemical substance as one originally protected by patents. Its main appeal is its lower price.
So competition in the generic drug market is fierce. A single generic option usually causes a 40% fall in the drug's prices, and five to six generic players cause a 90% reduction. As a result, this segment has lower margins, and no product differentiation to bank on.
Trendlyne’s share price history data shows that Nifty Pharma outperformed the Nifty 50 from 2010 to 2016. This was due to a sharp uptick in US generics sales, which Indian players benefitted from by exporting low-cost generic drugs to the US.
Nifty Pharma outperforms the Nifty 50 in nine out of past 15 years
But the easy generics money soon ran out, and a slowdown took hold in 2016. US generics became less profitable due to stricter regulations by the US FDA. The regulator also encouraged more generics competition. Nifty Pharma posted negative returns from 2016 to 2019.
Post-Covid, Indian pharma companies pivoted towards specialty and complex generics segments in the US to beat the slowdown in generics sales. Industry leaders like Sun Pharma, Cipla, and Dr Reddy’s embraced this strategy.
This pivot led to Nifty Pharma's sharp rise of 34% in 2023, and 39% in 2024. Relatively smooth USFDA inspections have also contributed to this, allowing Indian drug makers to speed up product launches and enhance profitability in the competitive US market.
However, not all companies enjoyed similar success. Firms like Aurobindo Pharma and Alkem Labs attempted to diversify into specialty injectables and biosimilars but faced challenges. Weak demand and persistent supply chain issues have undermined their efforts, limiting revenue growth.
India vs US: Where is pharma's focus?
Post-COVID, Indian companies have switched away from the broad generics space in the US, which had high competition, to complex generics (Cipla, Dr Reddy’s), specialty products (Sun Pharma), and peptides.
Abhay Gandhi, Sun Pharma's CEO (North America Business), said in the Q2FY25 earnings call, “The US specialty business has grown YoY. The underlying prescription trends for the specialty business are strong.”
This diversification strategy has fueled two growth engines - India and the US. In addition, the number of adverse classification outcomes from US FDA inspections fell in 2024 after a sharp uptick in 2019.
USFDA’s red flags decrease in 2024
In 2024, 206 USFDA inspections were conducted, of which only 14 (6.6%) resulted in official action (OAI). The OAI percentage has fallen from 11% in 2019. An OAI from the USFDA greatly impacts the profitability and product launch timeline for drugmakers.
US generics remain an important vertical. Several bestseller drugs are expected to go off-patent in the US, increasing the potential for generic alternatives. This could help offset any lower-than-expected India sales. The Indian pharmaceutical market's growth moderated to 7% in 2024. This was primarily due to a lack of price hikes on the National List of Essential Medicines products and a regulatory ban on 156 fixed-dose combination drugs.
The US market, on the other hand, has picked up in the last few quarters after a period of underperformance. This was helped by strong sales of the complex generic cancer drug Revlimid (lenalidomide).
In the generics space, companies must launch new complex generics to find the next blockbuster, which remains a concern.
Pharma companies expected to post strong numbers in Q3
According to a Q3 result preview report by KR Choksey, pharma companies’ revenue is expected to grow 10.8% YoY, led by strong US business, and domestic growth.
The EBITDA margin is expected to expand 198 bps YoY, led by a favorable product mix and increased focus on complex products. Falling freight and raw material costs are also expected to help margins. The average price of raw materials has fallen around 25% YoY in Q3FY25 to $114/Kg.
A diverse set of companies, from API manufacturers to branded generics manufacturers, are in the list of players expected to post positive revenue and net profit growth in Q3.
Divi’s Labs expected to post high revenue and net profit growth
Mankind Pharma depends mainly on Indian market growth (over 90% of revenue share), and its Q3FY25 revenue and net profit are set to increase for the eighth quarter. Its outperformance in market growth with IPM is expected to continue in the chronic segment in Q3.
Companies like Sun Pharma and Dr Reddy’s get a notable portion of their revenues from the US. While specialty products should drive revenue growth for Sun Pharma, new product launches remain key for Dr Reddy’s.
Divi’s Labs and Lupin saw a sharp turnaround in the past two years. Divi’s Labs is benefitting from lower raw material prices and high demand in the custom synthesis segment.
When it comes to Trendlyne’s DVM scores, these pharma companies boast high durability scores.
Pharma companies have medium momentum scores despite a weak quarter
Despite a weak quarter, these pharma companies’ momentum scores remain in the ‘Medium’ category. Zydus Lifesciences has the highest DVM score. It has good durability, medium valuation, and momentum scores, making it a ‘Mid-range Performer.’
Screener: Pharma stocks with high momentum and durability with rising operating profit margin in Q2
Pharma stocks with high momentum scores and rising operating margins
As we enter the results season, we look at stocks from the pharmaceutical industry with good momentum and durability with rising operating profit margin growth in Q2FY25. This screener shows pharmaceutical stocks with high Trendlyne momentum and durability scores with rising operating profit margins in Q2FY25.
Major stocks that feature in the screener are Procter & Gamble Health, Lupin, Granules India, Ipca Laboratories, Mankind Pharma, Orchid Pharma, Innova Captab, and Caplin Point Laboratories.
Lupin features in the screener with a good Trendlyne momentum score of 57 and a growth of 5.4 percentage points YoY in operating profit margin in Q2FY25. This pharma stock has a high momentum score, helped by an 18.7% rise in stock price over the past six months. The company’s operating margins improved due to lower freight costs, combined with a better mix of high-margin products, helped by new product launches like Mirabegron in the US and Luforbec in the UK.
Ipca Laboratories also appears in the screener after its operating profit margin grew by 3 percentage points YoY to 18.8% in Q2FY25. Operating margin improved, led by reduced raw material costs and a 25-30% cost reduction in active pharmaceutical ingredient (API) processes at its subsidiary, Unichem Laboratories. It also has a good Trendlyne Momentum score of 59, driven by a 28.7% surge in its stock price over the past six months.
You can find some popular screeners here.
Signing off this week,
The Trendlyne Team
