Pharmaceuticals & Biotech. share price target

In Q3FY25, companies within our pharma coverage revenue, EBITDA and Adj. PAT exceeded our expectations by 1.6%/3.7%/9.8%, respectively. The EBITDA margin and Adj. PAT margin outperformed our estimates by 53 bps and 133 bps, respectively.

Top Conviction Ideas (Pharma and Hospital) - Max Healthcare; Lupin; Fortis Healthcare.

Q3FY25 Earnings Preview - PHARMA & HEALTHCARE

In Q3FY25E, we expect double-digit YoY revenue growth from the pharma companies in our coverage. The revenue is expected to grow 10.8% YoY (+1.1% sequentially), driven by growth in domestic business and expansion in the US business.

In Q2FY25, companies within our pharma coverage revenue and EBITDA were in-line with our estimates, however Adj. PAT underperformed by 4.7%. The EBITDA margin was in-line with our
estimate, but Adj. PAT margin underperformed by 73 bps.
The aggregate revenue grew by 10.1% YoY and 1.8% QoQ. The corresponding EBITDA grew by 18.7% YoY but declined by 2.7% QoQ. EBITDA margins expanded by 180 bps YoY (-115 bps QoQ) to 24.9%.

Top Conviction Ideas - Healthcare Global Enterprises Ltd; Lupin Ltd; Dr. Reddy's Laboratories Ltd.

In Q2FY25E, we expect double-digit YoY revenue growth from the pharma companies in our coverage. The revenue is expected to grow 10.6% YoY (+2.2% sequentially), driven by continued growth in domestic and US segments.

Nifty Pharma is trading at 1-year forward PE of 34.5x vs. 22.8x for Nifty 50, indicating relatively richer valuation levels for the sector from a relative valuation’s perspective.
Nonetheless, given the strong earnings growth that we believe can be witnessed by Glenmark (42.5% CAGR), Lupin Ltd. (37.5% CAGR), and Zydus Life (16.2% CAGR) over FY24-FY26E, we consider them our preferred picks.

For Q1FY25E, we expect our Pharma coverage universe to post 12.5% Y-o-Y (+6.9% Q-o-Q) rise in revenue, 12.0% Y-o-Y (+9.7% Q-o-Q) increase in EBITDA and 11 bps decline Y-o-Y (+58 bps Q-o-Q) in EBITDA margins to 23.5% while exhibiting 20.3% Y-o-Y (+13.9% Q-o-Q) rise in adj. Net income.

Our Pharma universe focused on formulations such as Cipla, Dr. Reddy’s, Sun Pharma, and Zydus Lifesciences witnessed slower sales growth in the key markets of US, Europe and India; partially offset by stronger growth seen in international and Emerging markets, and APIs.
Slower growth in our Pharma universes’ formulations player’s revenue can be attributed to slower growth in specialty revenue for Sun Pharma while it continued to beat IPM, unfavorable seasonality and slower growth in India market for Cipla, and Zydus Lifesciences underperforming IPM while the US growth continued on the back of recent product launches in Q4FY24.

Top Sector Ideas Pharma - Q4FY24

? The IPM market is expected to be positive for Sun Pharma, Cipla, and Zydus Lifesciences. These companies from our coverage are expected to exhibit market beating or in line performance for Q4FY24E on the back of price increases and new product launches as well as growth in both chronic and acute segments.

In Q3FY24, our Pharmaceuticals coverage exhibited slight underperformance vis-a-vis estimates. Its revenue, EBITDA, and adjusted net income were 2.2%, 4.1%, and 2.1% below the estimates but EBITDA margin outperformed marginally by 8 bps to 22.8%. The aggregate revenue growth for the coverage was at 7.9% Y-o-Y (+0.3% Q-o-Q) to INR 500.70 Bn while EBITDA grew at 12.9% Y-o-Y (-0.7% Q-o-Q) to INR 113.97 Bn and EBITDA margins expanded by 101 bps Y-o-Y (-23 bps Q-o-Q) to 22.8% and adjusted net income rose by 21.9% Y-o-Y (-3.0% Q-o-Q) to INR 72.88 Bn for the quarter.

markets: We expect the coverage companies to clock in sales growth of 9.2% Y-o-Y (+2.5% Q-o-Q) in Q3FY24E. This should be aided by growth in India Pharma Market (IPM) which is expected to clock in ~8.6% Y-o-Y growth in Q3FY24 driven by recovery in Acute segment sales; partially offset by onset of festive season, destocking of channel inventory and high base effect in November 23.

Top Sector Ideas Pharma - Q2FY24

Indian Pharma Market (IPM) is expected to grow in the range of 4.0%-4.5% in Q2FY24E compared to 13.1% in Q2FY23, driven by significant reduction in volume growth (-4% YoY in Q2FY24 against +4.9% YoY in Q2FY23) and a slight dip in price growth (+5% YoY in Q2FY24E against +6.5% YoY in Q2FY23); however, new product launches will witness slightly higher growth (+3.1% YoY in Q2FY24 compared to +1.6% YoY in Q2FY23), despite a slower offtake in acute segment in Q2FY24E and a higher base.

Pharma - Q2FY24 - Earnings Preview

Windfall from the ongoing drug shortages and traction in gRevlimid sales in the US drove 16% / 45% / 41% YoY increase in revenue / EBITDA / PAT in Q1FY24 for the pharma companies under our coverage. Gross and EBITDA margins rose 300bps / 440bps YoY to 65.3% / 23.8% on an aggregate basis.

Top Sector Ideas - Pharma