Stockwatch: The Top Three Pharma Stocks to Bet On

 

Pharma stocks have been outperforming the Sensex and the Nifty ever since the Coronavirus struck the world. Big Bull Rakesh Jhunjhunwala has now also endorsed this sector saying that this might just be the beginning of a bull run in pharmaceutical stocks.So, here are three Pharma stocks you can bet on and why, as Prem Doshi of Ace Equities analyses them exclusively for GoNews.

1 – Aurobindo Pharma Ltd

Basics

82.6% from formulations and 17.4% from APIs

USA has largest geography with 47.7% |Europe 31.2% |India only 11.8% |Remaining ROW.

Good market share in Kidney related medicines, Overall, a well diversified portfolio.

Debt has been stable in the last 3 years at around Rs 5,000 crores, comparable to the Industry average.

This year – 18% revenue growth and 19% bottom line growth.

Revenue Rs 23,098 crores, PAT Rs 2,831 crores, EPS 48.31, Dividend Yes, Last 10 years only 1 loss year in 2012.

Current Price: 775, Market Cap Rs 45,400 crores, ROE 19%, ROCE 18.45%.

Stock P/E: 16x, Market Cap to Sales 1.97x.

Historical Valuations Chart

As per p/e chart if it has to go to to historical high valuations of 32x which it hit in 2013, or 30 which it hit in 2015, the stock from current levels of 775 can rally to 1440 at 30x and 1536 at 32x.
Upside potential on purely P/E high basis is 85% to 98%. However, if the peak comes early at last high of 22x that will leave only 37.5% gains on the table.

Mcap/Sales historical high valuations suggest upside potential of anywhere between 32.50% to 100% , i.e. 1030 to 1550 on the stock.

Technical View

Technically, the stock has a powerful multiyear breakout on a trend line above 815-820 range, and a horizontal breakout above all time multi year high of 895 with no known resistance above that.

Price Performance v/s Pharma Index suggests some out performance has started.

2 – Sun Pharmaceuticals Industries Ltd

Basics

Cardiovascular market share is at 7.6% | Gastro 7.5% | Diabetes 6.7% | Vitamins 2.2% | Consumer Healthcare 3% (Revital, Volini etc) |

38.1% Revenue from USA | 27.2% from India | 20.5% from other Emerging Markets including Russia | 14.2% from ROW |

Debt has been stable in the last 3 years at around Rs 7,500 crores.

This year – 13% rev growth and 41% profit growth (18% adj for other income fluctuation)

Revenue Rs 32,800 crores, PAT Rs 3,765 crores, EPS 15.65, Dividend Yes, in last 10 years never a loss year.

Current Price: 500, Market Cap Rs 12,0000 crores, ROE 9%, ROCE 14.09%.

Stock P/E: 30x, Market Cap to Sales 3.65x.

Historical Valuations Chart

The company’s peak near Daichi block deal was at near 10x market cap/sales, post that it has been a downward spiral. The last high has been 5.8x, currently it’s at 3.6x, recovering from an all-time low of 2.45x hit in early March. If we take 5.8x as the target, that leaves an upside of 61% from CMP of 500 to 805, and if such a re-rating happens, it won’t be surprising to see it scale up to 7-8x easily, which can lead to 100% price appreciation even from CMP.

Technical View

Technically, the stock has a very long-term channel pattern; it breaks out immediately above 510, and another powerful breakout above 540 on the charts.

Price Performance v/s Pharma Index suggests some out performance has started.

3 – Glenmark Pharmaceuticals Ltd

Basics

56.7% from branded generics, 41.4% from unbranded generics.

USA, Canada largest geography at 33.3% |India 31.7% |Europe only 14.8% |Remaining ROW.

Market share for medical anti-dandruff shampoo Scalpe+ at 15%, Dermatology market share at 9%, Respiratory at 5%.

Debt has been stable in last 3 years at around Rs 3,500 crores.

This year – 6% revenue growth and 22% bottom line de-growth (March qtr results for FY20 not announced yet)

12 months trailing - Revenue Rs 10,437 crores, PAT Rs 717 crores, EPS 25.42, Dividend Yes, the last 10 years no loss year.

Current Price: 402, Market Cap Rs 11,000 crores, ROE 15%, ROCE 16.81%.

Stock P/E: 16x, Market Cap to Sales 1x.

Historical Valuations Chart

The company’s best Financial Performance came in 2017, and before that in 2016, it was trading at 3.5x market cap to sales. Currently it is at 1x.

Even a 2X Mkt Cap/Sales will leave 100% upside potential in the stock, Glenmark seems to be at distressed valuations. If March Quarters springs a positive surprise it may lead to a bull run.

Technical View

Technically, the stock has a long-term falling wedge/channel pattern and it breaks out immediately above 480. Price action against the pharma index suggests some outperformance has started recently.