Domestic-focused pharma companies gain spotlight with stable growth outlook

Those with high non-US revenue streams such as Torrent Pharma, Ipca Labs, Ajanta Pharma and a few multinationals remain well placed

Domestic-focused pharma companies have gained favour looking at the stable growth outlook, as compared to the volatility seen in US markets. Experts say, at the structural level, the low hanging fruits in the US generics market have been plucked and a challenging path still lies ahead for generics. Momentum in the domestic pharma market, which is estimated to have grown about 11 per cent during FY19, however, continues making analysts are more bullish on companies having a larger domestic focus.

Analysts at Yes Securities, say, “The companies with dominant non-US revenue streams do not carry volatility associated with US exposure.” The growth in the domestic market remains sturdy, while the volatility associated with Goods and Service Tax (GST) implementation or price control are also behind. In fact, Ranjit Kapadia at Centrum Broking says that the domestic market is reaping the benefits of GST.

Moreover, there is no major threat from price control as seen in the past few years as most leading brands are now already under price control. In fact, such brands are now benefiting from volume growth and price hikes being taken based on WPI (Wholesale Price Index). Kapadia expects the sector to report good performance for March 2019 quarter due to steady domestic growth.

Multinational companies (MNC) having pure domestic focus also remain well placed with their established brands, product line extensions and new launches. For them too, the pain of price control is behind and they are reaping fruits of volume growth and price hikes.

Not surprising, stocks of Sanofi, Abbott and Pfizer have gained 14-49 per cent in last one year, while Merck tops the list with almost 150 per cent returns. As some of them may now be seeing stretched valuations, Sanofi and Pfizer remain favoured picks of Kapadia.

Amongst India-focussed domestic companies, Torrent Pharma and Ipca Laboratories have delivered over 50 per cent returns in last one year outperforming larger peers such as Lupin, Sun Pharma and Cadila, which have higher US exposure. While Torrent’s domestic growth (estimated at about 25 per cent over next two years) led by Unichem’s acquisition will drive prospects, Ipca’s branded formulations (domestic - 45 per cent and exports - 10 per cent of overall revenue) will drive its earnings despite regulatory issues in the US.

Likewise, Ajanta Pharma’s earnings pressure has bottomed out after sluggish institutional business in Africa. The company’s profits are expected to grow 20 per cent annually over the next two years led by its domestic portfolio.