RIL has remained flat in last two months, should one buy its shares now or not?

The pharmaceutical sector has lost steam following a dream run after the COVID-19 pandemic. This can be primarily attributed to the weak global economic growth, elevated raw material prices, regulatory concerns, and price erosion in the generics business in key US markets. Moreover, the recent conflict in Israel has prompted cautiousness, but we believe that the impact may be minimal for the Indian pharmaceutical industry. Companies such as Sun Pharma, through its Israeli-based subsidiary Taro Pharmaceutical Industries, are among the Indian companies that could be directly affected. Other prominent pharmaceutical companies like Dr. Reddy’s, Lupin, and Divi’s Labs may face challenges if the conflict spreads to the broader region.

Despite this challenging macro environment, we remain optimistic about the growth outlook of the Indian pharmaceutical companies. The domestic-focused companies are expected to generate stable growth amid a focus on new product launches and improved demand for generics and branded products. Further, IPM data provides comfort on the outlook for the domestic formulations business, which accounts for ~50% of the revenue of large-cap pharma companies. The chronic segment is expected to grow higher than the market on the back of large patent expiries aiding support to IPM growth visibility. To take advantage, pharma companies (Cipla, Torrent Pharma, Eris Lifesciences, and JB Chemicals, among others) have increased their chronic presence, focused on new product launches, and entered into new therapies. However, the acute segment growth is likely to slow down due to delays in monsoon.

In recent quarters, the pharma sector has seen improvement on the back of improved performance in the US generics market, robust performance in branded markets, moderation in raw material costs, and market share gains in recently launched products. All these factors have recently contributed to strong Q2FY24 earnings of domestic pharma companies.

We expect pharma companies with a focus on US business (Sun Pharma, Lupin, Aurobindo, and Dr. Reddy’s) to witness normalcy in demand and higher new product launches despite pricing challenges, intense competition, and stricter regulatory compliance requirements. While the APIs-focused companies (Divi’s Labs, Laurus Labs, and Aarti Drugs, among others) witnessed a temporary slowdown in order flow from developed markets, the China+1 strategy is a long-term growth driver for API companies and the outlook remains robust.

Going ahead, the domestic growth is expected to be in the mid-teen digits. In contrast, US market growth would remain robust due to new launches, field force expansion and some moderation in the price erosion in the base business. We also expect margins of pharma companies to improve amid normalizing raw material & freight costs, easing in the US price erosion, and a better product mix. Thus, the focus remains on companies with branded businesses and exposure to the US generics market such as Sun Pharma, Dr. Reddy’s, Cipla, Torrent Pharma, and Ajanta Pharma. With the valuations of the overall pharmaceutical sector at attractive levels, the long-term growth outlook for pharma companies remains intact and is expected to deliver robust performance in upcoming quarters.

The author is head of research, StoxBox. Views are personal.