Pharma Sector - Growth Recovery In FY24 To Drive Valuations: Nirmal Bang's Thematic View

Nirmal Bang Report

Almost all pharmaceuticals companies in our coverage universe are trading at deep discounts (average ~25% discount) versus the historical five-year average forward multiples - even excluding Covid-19 period valuations.

FY23 has been a challenging year for the sector owing to slowdown in overall growth, margin contraction and enhanced regulatory concerns.

Domestic growth has been impacted by a higher Covid base while U.S. generics business has been impacted by double-digit price erosion. Margins have also contracted due to U.S. price erosion, elevated cost inflation and a higher Covid base.

Apart from these headwinds, enhanced regulatory concerns, which were absent during the Covid period, have also resurfaced, affecting sentiment for the sector.

As the base normalises, we believe that domestic growth is expected to be back in double digits in FY24 while price erosion in the U.S. is expected to cool off from double-digit levels to single digit levels.

On the margin front, cost inflation is normalising, and companies have to a great extent passed on the burden of additional costs, largely in branded markets.

On the flip side, we believe that the U.S. Food and Drug Administration inspections are still on the lower side (330 in CY19 against 77 in CY22), but the same are expected to increase from here on.

Hence, our focus remains on companies that are heavy on branded generics and have the least exposure to U.S. generics.

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