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Ever since the outbreak of Covid-19, pharma stocks have become the darling of Dalal Street. As a matter of fact, the Nifty Pharma index outperformed the benchmark index Nifty 50 by 10 percentage points. From March 24, 2020, to date Nifty Pharma index surged 113% compared to Nifty 50 advancing by 103%. With things improving on the Covid front the next big trigger for the pharma sector is the production-linked incentive.

The production-linked incentive (PLI) schemes announced by the Government of India (GoI) for key raw materials such as bulk drugs and formulations with a total incentive outlay of Rs 21,000 crore will reduce import dependence and boost domestic production of high-value products and increase the value addition in exports. Further, the GoI announced the promotion of a bulk drug parks scheme with a financial outlay of Rs 3,000 crore for three select states, which will provide infrastructure assistance to the active pharmaceuticals ingredients (API) players.

Credit rating firm ICRA believes that the production linked incentives will give impetus to R&D-based Indian pharmaceutical companies as they foray into the production of high value-add pharmaceutical products along with backward integration for input materials and reduce import dependence. “With entire capex being reimbursed by the GoI in the form of PLI over the period of the scheme, this will lead to an increase in scale and market share for select Indian pharmaceutical companies while ensuring a steady domestic supply of key input materials,” said the rating agency in a report.

Aatmanirbhar in APIs

The Phase-I of PLI scheme (announced in July 2020 and approvals accorded through April 2021) for API players focuses on reducing dependence on imports. As per industry estimates, India imported approximately Rs 25,000 crore worth of KSMs (Key Starting Materials), DIs (Drug Intermediates), and APIs in FY2020, with 65-70% of such imports from China. ICRA expects the imports from China to reduce by approximately 25-35% once such capacities are fully commercialised.

Incentivizing R&D

The PLI-II scheme (announced in February 2021) focuses on production and diversification into high-value pharmaceutical products (formulations/ KSMs/ DIs/ APIs/ Others) with a thrust on exports. “With a total approved outlay of Rs 15,000 crore across categories to be disbursed over the FY2023-FY2028 period, the scheme is expected to generate incremental sales of Rs 2.94 lakh crore (including exports of Rs 1.96 lakh crore) over the six-year scheme period. The scheme to add approximately 15% to the current market size of the pharma market once fully implemented,” noted the report by ICRA.

Stock picks

Concurring to ICRA views, Axis Securities expect domestic formulations to grow at 6/10% and companies under coverage to outperform with 10/11% YoY growth in FY22/23. In the domestic play, the brokerage firm has cherry-picked the following stocks.

Alkem Laboratories | Price target: Rs 3,500 | Upside: 11%

Growth in domestic business to revive from FY22 due to its key moat (strong brands and leadership in the acute segment). The company expects acute growth via various initiatives such as de-cluttering of brands, medical representative addition and focus on market share improvement in key brands. The Chronic segment, it is focusing on a few key launches and doctor coverage expansion. Given improving growth visibility and improving free cash flow generation, we raise FY22/23F earnings per share est. by 4%/7%.

Eris Life Sciences | Price target: Rs 815 | Upside: 16%

Eris seems to be in a sweet spot given the significant opportunity in the near to medium term on ongoing/upcoming patent expiry of large anti-diabetes molecules (Vildagliptin, Dapagliflozin, other SGLT-2, Sitagliptin, etc.). While growth in the past has been lower than expected, we expect it to outgrow the Indian pharmaceutical market due to launch visibility in Chronic/sub-Chronic segments, the recent restructuring of divisions for a higher focus on core therapies and strengthening of the management team.

Torrent Pharmaceuticals | Price target: Rs 3,100 | Upside: 5%

US sales recovery from FY22 led by the commercialization of Levittown facility in Apr’21 and new launches. We expect US sales (~19% of sales) to grow to $210 million in FY23 vs $171 million expected in FY21. Growth in Germany in FY22 with completion of quality management system upgradation, new launches and focus on high volume products. Steady sales in Brazil to be led by chronic focus, new launches. Steady growth in Brazil as Covid impact moderates and currency depreciation to normalize. Improving growth in India, Germany, Brazil is positive and expect growth to be led by the US from H2FY22/ FY23 post-USFDA inspection.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing)