Nifty Pharma stands among the worst performing sectors in the year so far and has declined by 15% YTD. Nevertheless, CLSA is bullish on pharma stocks under its coverage. In its recent report, it has initiated coverage on generics injectables specialist Gland Pharma with a ‘Buy’ rating and a target price of Rs 3450/share. They have also initiated coverage on CDMO services focused Syngene with a ‘Buy’ rating. CLSA has also reiterated its ‘Buy’ rating on Piramal Enterprises but has cut its target price to Rs 2,250/share from 2,330/share earlier.
Why is CLSA bullish on these stocks? Let’s break it down. India’s pharma outsourcing sector has a lot going in its favor. In fact, industry players are expecting the pharma outsourcing market to deliver an 11% CAGR over 2021-26 and is expected to reach $ 200 bn by 2026. Additionally, recent events have raised the regulatory risk for Western firms partnering with Chinese labs which is consequently encouraging them to look for alternatives to diversify their supply chains. India emerges as an appropriate alternative due to its unmatched track record in generic drug development. As a result, Indian firms with a global footprint are expected to benefit.
In CLSA’s opinion, companies under coverage are expected to deliver consistent revenue growth in the 15-20% range over FY22-25CL. Now this is actually faster than their own historical growth rates in FY19-22. CLSA is also forecasting gradual margin expansion and improvement in return ratios. With long revenue streams and resilient business models, CLSA believes that these firms are available at reasonable valuations. Given the prospects ahead of pharma companies, CLSA has a ‘Buy’ call on Gland Pharma, Syngene as well as Piramal Enterprises.
