India Pharma Sector Set for Robust Growth Amidst Margin Concerns

As the Q4 FY24 earnings season is going on, Goldman Sachs (NYSE:GS) analysts have recalibrated their projections for the Indian pharmaceutical sector, factoring in a spectrum of variables from monthly sales data to currency fluctuations. Notably, the sector continues to trade at valuations exceeding one standard deviation above its five-year average, largely propelled by the resilience of major players like Sun Pharma (NS:SUN), Cipla (NS:CIPL), and Divi’s Laboratories.

In their latest report, Goldman Sachs emphasizes the significance of management commentary on several pivotal factors: the trajectory of domestic market expansion, trends in US generic drug pricing, and the outlook for margins in the fiscal year 2025.

The analysts maintain a bullish stance on select stocks, including Syngene, Neuland, Torrent Pharma (NS:TORP), Aurobindo, Gland, and Biocon (NS:BION), while expressing reservations regarding Laurus, Cipla, and Sun Pharma.

Key Highlights for Q4FY24 Results

1. Domestic Market Dynamics: Despite a modest uptick in base volume growth, stable pricing dynamics and recent patent expirations continue to underpin new product momentum. Management guidance on volume growth sustainability and the impact of pricing adjustments in the National List of Essential Medicines (NLEM) portfolio remains crucial.

2. US Generic Pricing: While base-business erosion concerns have tempered, Goldman Sachs underscores the transitory nature of the current pricing environment. They anticipate stabilization in price erosion at mid-to-high single digits, a trend likely to benefit companies like Aurobindo and Gland.

3. Margin Outlook: The robust gross margins witnessed in the past fiscal year are anticipated to persist, albeit with potential headwinds from input cost escalations. Management commentary on cost dynamics amidst a volatile commodity price environment will be closely monitored.

Goldman Sachs has revised their earnings estimates, factoring in recent market developments and rolling forward valuation bases. Notable adjustments include revisions to target prices, with top picks identified as Torrent Pharma for its structural exposure, Aurobindo for tactical US generics play, and newcomers Syngene and Neuland. Conversely, downward revisions were made for Laurus, Cipla, and Sun Pharma, citing specific factors impacting earnings projections.

Now, how to catch the right stock from a list of many by these astute investors? Here’s the framework that investors can follow to make convincing investment decisions. Firstly, investors can keep a track of stocks that have been upgraded by giants such as Morgan Stanley (NYSE:MS), Goldman Sachs, etc.

Then, investors can check the real valuation of the stock, also known as fair value in InvestingPro to gauge what is the estimated upside potential left in the counter. Investors can then choose 2-3 stocks with the highest potential for their portfolio.

Image Source: InvestingPro+

Here’s an example. In the above report by Goldman, Gland Pharma (NS:GLAD) has been given a buy rating with a TP of INR 2,000 (CMP - INR 1,762). Now we’ll go to InvestingPro to see what the complex financial models tell us about. There, the fair value for this counter is INR 1,934.5, which is a 9.6% upside, compared to the 13.5% given by Goldman.

There is a slight difference between the TPs but the broader sentiment of the analyst covering the stock and InvestingPro’s financial models is in the same direction - Bullish. Such stocks that give this kind of confirmation can be a strong candidate for the portfolio.

On the contrary, there could be some stocks that are shown to have downside potential but are given a buy rating by the analyst, such stocks can be avoided.

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