Pharma & Healthcare: Domestic healthcare consumption plays preferred

3 Jan 2024 , 12:29 PM

The outlook for the overall Pharma sector for 2024 remains fairly upbeat. US generic market has seen moderating intensity of price erosion which has marginally improved the US business margins/earnings performance of large-cap export-focussed pharma players in 2023. However, the improving pricing environment in the US generics market might not sustain beyond the next 1yr period and price erosion intensity will increase as buyers ultimately shift their focus from supplies to pricing. Export-focussed players are still dependent on one-off large product opportunities for growth and will continue to witness earnings volatility over the medium term. Comparatively, the domestic India Pharma Market (IPM) continues to clock a secular 9-10% growth for the industry. Most of the mid-cap pharma companies continue to outperform IPM growth by 300-400bps p.a., thereby driving an improvement in their business mix, profitability levels and return metrics. Analysts of IIFL Capital Services top-picks in the Pharma sector are Mankind, JB Pharma, Sun Pharma and Aurobindo. They continue to maintain a cautious view on Divi’s/Dr. Reddy’s/Gland/Ipca and Divi’s and Dr. Reddy’s are their top SELL ideas for 2024. 

The India healthcare delivery market is expected to sustain its 13-14% Cagr over the next 4-5 years driven by increasing prevalence of chronic diseases, rising affordability levels, medical tourism and government’s push on primary healthcare in rural markets. With the Hospital industry set to add ~40% incremental bed capacities over the next 4yr period, analysts of IIFL Capital Services believe volume growth will start improving even for the larger hospital players from H2FY25. They remain positive on the Hospital sector given the improving occupancies in existing hospitals, capacity expansions, and consistent ARPOB growth of 5-7% should drive 18% Ebitda Cagr for the industry over FY23-26. Apollo and KIMS are analysts of IIFL Capital Services top-picks and they recommend adding Max and Rainbow on corrections.

Domestic Branded Pharma – Mankind and JB Pharma are analysts of IIFL Capital Services top picks

The domestic India Pharma Market (IPM) continues to clock secular 9-10% growth, led by price hikes of 5-6%, volume growth of 2% and new introductions of 2-3%. Most of the mid cap pharma companies (Mankind, JB Pharma, Alkem, Ajanta), deriving 70-90% of their overall Ebitda from branded generic markets of India/RoW, continue to outperform domestic pharma market growth by 300-400bps p.a., thereby driving an improvement in their business mix, profitability levels and return metrics.

Analysts of IIFL Capital Services expect these midcap players to sustain India business outperformance, driven by their stronger volume growth of 6-8% p.a., market leadership in certain large brands and continued scale-up in chronic therapies through both organic and inorganic measures. With export-focussed players being primarily dependent on one-off large product opportunities for growth (Revlimid, Spiriva etc.) which will start facing incremental generic competition over the next 2yr period, analysts of IIFL Capital Services believe earnings and cash flow generation of domestic-focussed formulation companies will continue to sustainably outperform that of export-focussed peers over the medium term.