Pharma index up 45% from March lows; CLSA says earnings momentum to continue, raises targets

Pharma stocks have been on buyers' radar with governments across the world focusing on healthcare following the coronavirus outbreak that has killed more than 263,000 people and infected more than 3.7 million globally.

In the last few days, India has seen a spike in infections with confirmed cases inching close to 53,000. The death toll is at 1,783.

There is no cure for COVID-19, the respiratory illness caused by the virus. Human trials for vaccines and drugs are on but a definitive treatment seems to be months, if not years, away.

For now, drugs that control fever and anti-malarial drugs are being prescribed to treat the symptoms or for emergency use.

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Companies that produce hydroxychloroquine, an anti-malarial drug, and other pharma firms have done well over the last two months. There is expected to be a huge demand for the pharma sector in the coming years, analysts say.

"Earnings momentum will continue in pharma space. We prefer a stock-specific approach after the broad-based rally," said CLSA, which raised earnings estimates for the sector by 5-7 percent for FY21-22.

The Nifty Pharma index gained half a percent on May 6, taking total gains to around 45 percent since March 23.

"Sun Pharma, Cipla, Aurobindo Pharma and Cadila Healthcare are our top picks, but as the risk-reward turned unfavourable for Lupin, we downgraded rating to sell from outperform," said CLSA. It also lowered Abbott India to outperform from buy.

But the brokerage has significantly raised target price of all stocks under its coverage.

"We raise target for Lupin to Rs 780 from Rs 660 per share, Abbott to Rs 20,320 from Rs 16,850, Torrent Pharma to Rs 2,600 from Rs 2,010, Dr Reddy's Labs to Rs 4,250 from Rs 3,170, Sun Pharma to Rs 590 from Rs 520, Aurobindo Pharma to Rs 790 from Rs 520, Cipla to Rs 720 from Rs 480 and Cadila Healthcare to Rs 400 from Rs 350 per share," it said.

After almost four years of under-performance, pharma seemed to have regained its mojo in the last two months, Sanjiv Bhasin of IIFL said.

Indian pharma stocks would lead the bull run for the next two to three years as earnings, volumes and growth will rise. "Also the need for medicine stocking may be more psychological which could drive higher volumes both globally and locally," he said.

Jefferies expects Sun Pharma to report 21 percent earnings CAGR over FY20-22 against 14 percent for Dr Reddy's Labs.

"Business mix for Sun Pharma is superior and key earnings drivers are India, while Dr Reddy Labs is more reliant on US generic launches where risks are high," Jefferies said.

Dr Reddy was trading at historical valuations but with cost rationalisation behind, execution in US/India must improve for the company, while Sun Pharma was trading at discount to peers and expectations were low, it added.

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