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Outperformance by Pharma helped add c200‐bp to its weight in the
Nifty over 2010 and 2011. This is a part of a long‐term reversal that
may lift the weight to c5% by end of FY13f. Our model also points to
high absolute return of c40% during FY13. Pharma scores well among
‘defensive’ sectors due to its relatively low P/E, higher earnings growth
and the shrinking PEG gap. Within Pharma, investors’ perception
points to a peaking mind share of US exports and the larger role of the
domestic market in shaping valuations. In US generics, the focus is
likely to shift to the base pipeline; DRRD is our preferred play. SUNP is
our classical defensive pick; CIPLA is a defensive in a volatile
environment. DIVI is our pick to participate in the upturn.
Expansion in sector’s Nifty weight, high absolute returns may persist
We observe a strong correlation between the pharma sector P/E’s
premium/discount (P/D) to the Nifty P/E and the corresponding change in the
sector’s weight. If the trend sustains, the sector’s weight may rise through
FY13f to settle at 5.0% by Mar13, c70‐bp up from current levels. A similar
outcome (of a rising weight) in broader indices can, thus, be expected. The past
years also reveal a link between the rise in MCap (over revenue growth) and
the sector’s Nifty weight. Riding on this correlation, a set of Pharma stocks
could potentially deliver 48% return in FY13f. Further, Pharma is likely to
deliver PAT growth higher than the Nifty during FY12f/FY13f; and based on past
years’ data, this earnings trend could support continued outperformance.
Earnings growth, valuation look good, even among defensives
While the pharma sector faces headwinds, there are significant protectives too.
Pharma may also hold an edge over other defensives on account of its higher
earnings growth, relatively lower and more stable P/E and the shrinking PEG
gap, supporting a thesis of investments into the sector.
Perception changes: India clawing back; US likely losing mind share
Monitoring changing perceptions throws a few pointers to what investors
believe constitutes the next wave of growth. Peaking mindshare of US generics
is noticeable. With the meaty gains from the market expected to truncate, the
prominence of non‐US exports is likely to increase. The perceived health of the
domestic segment may evolve to be the prominent influence on valuation.
DRRD play on base US, SUNP a defensive, CIPLA a bet in a volatile envt.
The slimming Para‐IV opportunities are pushing to the forefront the strength of
the base generic pipeline. We prefer DRRD on its pipeline strength; the
company also enjoys the most significant correlation, with incremental revenue
share coming from the base US generics and the change in MCap. With a strong
inverse correlation with the Nifty P/E, SUNP is a classical defensive, while in a
volatile environment CIPLA has also emerged as a defensive. In a rising market
too, SUNP has delivered amongst the strongest relative gains; DIVI and BIOS
could also be likely bets to ride the wave up.
Investment summary
The outperformance of the pharma sector and the expansion of its weight in the Nifty are likely to extend into FY13.
The rise in the premium over the P/E of the Nifty in 2011 portends a rise in Pharma’s weight to 5%. That, coupled with
high‐teens revenue growth could drive an absolute return of over 40% in FY13f. Pharma may also hold an edge over
other defensives on account of its higher earnings growth, relatively lower and more stable P/E and the shrinking PEG
gap. Within Pharma, this report focuses on the changing perceptions of investors about the next wave of growth. A
peaking mind share of US exports is visible. Domestic formulations are now the bastion of growth; the perceived health
of the segment may evolve as the prominent influence on valuation. In the US, dwindling Para‐IV opportunities could
push the strength of the base pipeline to the forefront. We prefer DRRD on its base US pipeline; the company also
enjoys the most significant correlation, with incremental revenue share coming from base US generics and the change
in MCap. SUNP is our classical defensive bet, while also delivering the highest relative returns in an upward spurt. CIPLA
has also emerged as a value preserver in a volatile environment. Along with SUNP, DIVI and BIOS are our bets to ride
the wave up.
Rebound in sector’s weight in the Nifty likely to extend
Even as the weight of Pharmaceuticals in the Nifty rebounded from a low of 2.4% in FY08 to the current
level of 4.3%, it stays at less than half its peak of 9.4% in Mar02. The weight had begun to rebound in
FY09 itself, driven by the sector’s relative outperformance. We observe an 87% correlation between
the weight and the sector’s P/E premium to the Nifty. The rising P/E premium over the Nifty suggests
that Pharma’s weight in the index may continue to expand; by Mar13, we estimate the weight to settle
at 5%, up c70‐bp from current levels. A similar outcome in broader indices can also, thus, be expected.
High absolute returns may persist through FY13f
The past five years also reveal that the rise in market value of Pharmaceutical stocks correlates with
the annual revenue growth of the sector and the change in its weight in the Nifty. This correlation leads
to a forecast of a 44% rise in market value of Parma stocks for FY13, if current estimates for revenue
growth are applied and if the sector’s weight stays at 4.3%. Should the weight rise to 5.0% by Mar13,
the potential rise in the MCap for FY13f could settle at 48%. The earnings growth for FY13f/FY14f for a
peer set of front‐line pharma stocks is forecast to exceed that for the Nifty. As the data of previous
years suggests, this is likely to support the outperformance for the wider pharma sector through FY13f.
Earnings growth, valuation look good, even among defensives
Like other ‘defensive’ sectors, Pharma is forecast to grow its FY13 earnings faster than the Nifty.
However, the consensus forecast growth for Pharma exceeds that for Consumer and IT Services. The
P/E range of Pharma has been relatively stable – 17.8x to 23.8x – compared with that of Consumer and
IT Services. Over the past 33 months, the P/E of Pharma has stayed well below its peak, and is now, in
fact closer to its trough; this is in contrast with the P/E of Consumer stocks that has stayed close to the
peak. Adjusted for growth, the PEG of Pharma is in distinct decline relative to the PEGs of Consumer
and IT Services, supporting a thesis of investments in the sector amongst a choice of other defensives.
Perception changes: India clawing back; US likely losing mind share
As we monitor the changing perceptions, a few pointers emerge about the likely lightposts to what
investors believe would constitute the next wave of growth. A decline in opportunities in US generics is
noticeable in the peaking mind share of US exports; with the meaty gains expected to truncate, the
prominence of non‐US markets is likely to increase. Domestic formulations are now the bastion of
growth; the segment’s perceived health may evolve as the prominent influence on valuation. Forecast
earning trends across a group of stocks reiterates these pointers: a below‐market growth performance
in India may face the wrath of investors; companies largely dependent on Para‐IV opportunities have
faced the brunt of large downgrades; and investors are rewarding stronger balance sheets.
US base generics crucial as one‐offs taper; DRRD a preferred play
As the global industry sits on a patent cliff, the number of one‐off opportunities for generic companies
is likely to come down. Moreover, the competitive environment during the exclusivity period is
changing. The slimming Para‐IV opportunities are likely to impact stock valuations that depend solely
on one‐off gains. In our view, the strength of the base generic pipeline in the US is likely come to the
forefront. We prefer DRRD on its pipeline strength; the company also enjoys a significant correlation
with incremental revenue share coming from the base US generics and the change in MCap.
SUNP a classical defensive; CIPLA also a protective in volatile envt
SUNP is our classical defensive play. The stock’s P/E change shows a strong inverse correlation with the
change in the Nifty P/E; strong earnings momentum provides fundamental support. Over the most
recent periods of a sharp market decline, with the highest relative return from the coverage universe,
CIPLA has also emerged as a defensive. In a swift market move up too, SUNP has delivered amongst the
strongest relative gains. SUNP, along with DIVI and BIOS, could be likely bets to ride the wave up.
Maintain rating on Cadila Healthcare (CDH IN, Hold), Divi’s Laboratories (DIVI IN, Buy), Lupin (LPC IN,
Hold), Sun Pharmaceuticals (SUNP IN, Add); downgrade rating on Cipla (CIPLA IN, Add), Glenmark
Pharmaceuticals (GNP IN, Hold); initiate coverage of Dr. Reddy’s Laboratories (DRRD IN, Add).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Outperformance by Pharma helped add c200‐bp to its weight in the
Nifty over 2010 and 2011. This is a part of a long‐term reversal that
may lift the weight to c5% by end of FY13f. Our model also points to
high absolute return of c40% during FY13. Pharma scores well among
‘defensive’ sectors due to its relatively low P/E, higher earnings growth
and the shrinking PEG gap. Within Pharma, investors’ perception
points to a peaking mind share of US exports and the larger role of the
domestic market in shaping valuations. In US generics, the focus is
likely to shift to the base pipeline; DRRD is our preferred play. SUNP is
our classical defensive pick; CIPLA is a defensive in a volatile
environment. DIVI is our pick to participate in the upturn.
Expansion in sector’s Nifty weight, high absolute returns may persist
We observe a strong correlation between the pharma sector P/E’s
premium/discount (P/D) to the Nifty P/E and the corresponding change in the
sector’s weight. If the trend sustains, the sector’s weight may rise through
FY13f to settle at 5.0% by Mar13, c70‐bp up from current levels. A similar
outcome (of a rising weight) in broader indices can, thus, be expected. The past
years also reveal a link between the rise in MCap (over revenue growth) and
the sector’s Nifty weight. Riding on this correlation, a set of Pharma stocks
could potentially deliver 48% return in FY13f. Further, Pharma is likely to
deliver PAT growth higher than the Nifty during FY12f/FY13f; and based on past
years’ data, this earnings trend could support continued outperformance.
Earnings growth, valuation look good, even among defensives
While the pharma sector faces headwinds, there are significant protectives too.
Pharma may also hold an edge over other defensives on account of its higher
earnings growth, relatively lower and more stable P/E and the shrinking PEG
gap, supporting a thesis of investments into the sector.
Perception changes: India clawing back; US likely losing mind share
Monitoring changing perceptions throws a few pointers to what investors
believe constitutes the next wave of growth. Peaking mindshare of US generics
is noticeable. With the meaty gains from the market expected to truncate, the
prominence of non‐US exports is likely to increase. The perceived health of the
domestic segment may evolve to be the prominent influence on valuation.
DRRD play on base US, SUNP a defensive, CIPLA a bet in a volatile envt.
The slimming Para‐IV opportunities are pushing to the forefront the strength of
the base generic pipeline. We prefer DRRD on its pipeline strength; the
company also enjoys the most significant correlation, with incremental revenue
share coming from the base US generics and the change in MCap. With a strong
inverse correlation with the Nifty P/E, SUNP is a classical defensive, while in a
volatile environment CIPLA has also emerged as a defensive. In a rising market
too, SUNP has delivered amongst the strongest relative gains; DIVI and BIOS
could also be likely bets to ride the wave up.
Investment summary
The outperformance of the pharma sector and the expansion of its weight in the Nifty are likely to extend into FY13.
The rise in the premium over the P/E of the Nifty in 2011 portends a rise in Pharma’s weight to 5%. That, coupled with
high‐teens revenue growth could drive an absolute return of over 40% in FY13f. Pharma may also hold an edge over
other defensives on account of its higher earnings growth, relatively lower and more stable P/E and the shrinking PEG
gap. Within Pharma, this report focuses on the changing perceptions of investors about the next wave of growth. A
peaking mind share of US exports is visible. Domestic formulations are now the bastion of growth; the perceived health
of the segment may evolve as the prominent influence on valuation. In the US, dwindling Para‐IV opportunities could
push the strength of the base pipeline to the forefront. We prefer DRRD on its base US pipeline; the company also
enjoys the most significant correlation, with incremental revenue share coming from base US generics and the change
in MCap. SUNP is our classical defensive bet, while also delivering the highest relative returns in an upward spurt. CIPLA
has also emerged as a value preserver in a volatile environment. Along with SUNP, DIVI and BIOS are our bets to ride
the wave up.
Rebound in sector’s weight in the Nifty likely to extend
Even as the weight of Pharmaceuticals in the Nifty rebounded from a low of 2.4% in FY08 to the current
level of 4.3%, it stays at less than half its peak of 9.4% in Mar02. The weight had begun to rebound in
FY09 itself, driven by the sector’s relative outperformance. We observe an 87% correlation between
the weight and the sector’s P/E premium to the Nifty. The rising P/E premium over the Nifty suggests
that Pharma’s weight in the index may continue to expand; by Mar13, we estimate the weight to settle
at 5%, up c70‐bp from current levels. A similar outcome in broader indices can also, thus, be expected.
High absolute returns may persist through FY13f
The past five years also reveal that the rise in market value of Pharmaceutical stocks correlates with
the annual revenue growth of the sector and the change in its weight in the Nifty. This correlation leads
to a forecast of a 44% rise in market value of Parma stocks for FY13, if current estimates for revenue
growth are applied and if the sector’s weight stays at 4.3%. Should the weight rise to 5.0% by Mar13,
the potential rise in the MCap for FY13f could settle at 48%. The earnings growth for FY13f/FY14f for a
peer set of front‐line pharma stocks is forecast to exceed that for the Nifty. As the data of previous
years suggests, this is likely to support the outperformance for the wider pharma sector through FY13f.
Earnings growth, valuation look good, even among defensives
Like other ‘defensive’ sectors, Pharma is forecast to grow its FY13 earnings faster than the Nifty.
However, the consensus forecast growth for Pharma exceeds that for Consumer and IT Services. The
P/E range of Pharma has been relatively stable – 17.8x to 23.8x – compared with that of Consumer and
IT Services. Over the past 33 months, the P/E of Pharma has stayed well below its peak, and is now, in
fact closer to its trough; this is in contrast with the P/E of Consumer stocks that has stayed close to the
peak. Adjusted for growth, the PEG of Pharma is in distinct decline relative to the PEGs of Consumer
and IT Services, supporting a thesis of investments in the sector amongst a choice of other defensives.
Perception changes: India clawing back; US likely losing mind share
As we monitor the changing perceptions, a few pointers emerge about the likely lightposts to what
investors believe would constitute the next wave of growth. A decline in opportunities in US generics is
noticeable in the peaking mind share of US exports; with the meaty gains expected to truncate, the
prominence of non‐US markets is likely to increase. Domestic formulations are now the bastion of
growth; the segment’s perceived health may evolve as the prominent influence on valuation. Forecast
earning trends across a group of stocks reiterates these pointers: a below‐market growth performance
in India may face the wrath of investors; companies largely dependent on Para‐IV opportunities have
faced the brunt of large downgrades; and investors are rewarding stronger balance sheets.
US base generics crucial as one‐offs taper; DRRD a preferred play
As the global industry sits on a patent cliff, the number of one‐off opportunities for generic companies
is likely to come down. Moreover, the competitive environment during the exclusivity period is
changing. The slimming Para‐IV opportunities are likely to impact stock valuations that depend solely
on one‐off gains. In our view, the strength of the base generic pipeline in the US is likely come to the
forefront. We prefer DRRD on its pipeline strength; the company also enjoys a significant correlation
with incremental revenue share coming from the base US generics and the change in MCap.
SUNP a classical defensive; CIPLA also a protective in volatile envt
SUNP is our classical defensive play. The stock’s P/E change shows a strong inverse correlation with the
change in the Nifty P/E; strong earnings momentum provides fundamental support. Over the most
recent periods of a sharp market decline, with the highest relative return from the coverage universe,
CIPLA has also emerged as a defensive. In a swift market move up too, SUNP has delivered amongst the
strongest relative gains. SUNP, along with DIVI and BIOS, could be likely bets to ride the wave up.
Maintain rating on Cadila Healthcare (CDH IN, Hold), Divi’s Laboratories (DIVI IN, Buy), Lupin (LPC IN,
Hold), Sun Pharmaceuticals (SUNP IN, Add); downgrade rating on Cipla (CIPLA IN, Add), Glenmark
Pharmaceuticals (GNP IN, Hold); initiate coverage of Dr. Reddy’s Laboratories (DRRD IN, Add).
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