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Gladiator Stocks: Pharma Thematic - ICICI Securities

Posted On: 2020-09-18 06:35:15

- Stable earnings visibility, least stressed balance sheets, healthy free cash flows and ability to deliver products in the time of crisis are some of the key attributes of Indian pharma

- Over the last few quarters, most of the players are recalibrating capex and R&D spend in order to optimise capital utilisation. The current situation, underpinned by Covid 19 pandemic and its negative impact on most of the sectors further strengthens the argument for investment in pharma

- While Q1 performances of most of the Pharma companies have been skewed, we believe H2 should reflect the normalised trend

- Technically, the Pharma index has registered a structural turnaround on long term charts. At the current juncture, we find Cadila Healthcare and Caplin Point Laboratories are well placed in terms of favourable risk-reward setup from a medium term perspective

Cadila Healthcare

Technical View

- The pharma sector has been relatively outperforming over the past couple of months after witnessing a structural turnaround off March 2020 lows, signalling a reversal of five year long downtrend

- In the pharma space, Cadila Healthcare has been relatively underperforming. However, currently it has been seeing faster pace of retracement as it retraced past five week's decline (Rs. 412-358) in just a single week, signalling acceleration of upward momentum, auguring well for the next leg of up Structurally, the stock has witnessed strongest up move since CY17 as current up move off March low of Rs. 202 (108%) is stronger than CY16-17 rally (90%). The elongated rally signifies structural turnaround

- We expect the stock to form a higher base and gradually head towards Rs. 485 levels in coming months as it the 80% retracement of 2017-19 decline (Rs. 560-206) placed at Rs. 488

Fundamental View

- Cadila is one of the old generation family owned pedigree companies which, after establishing a strong base in domestic formulations, shifted focus to the exports markets

- US (44% of FY20 revenues) grew at ~12% CAGR in FY16-20 backed by aggressive filings, product launches. Launch of authorised generics also contributed to overall growth. US pipeline (cumulative) consists of 390+ filed ANDAs, 95 pending final approvals. However, resurfacing of cGMP issues at Moraiya, imminent slowdown in base are main near term headwinds. We expect US sales to grow at ~9% CAGR in FY20-22E to Rs. 7426 crore

- On the US front, the company plans to venture into complex injectables (45 filed ANDAs + 14 in-licensed products), which is likely to provide meaningful traction from FY23-24 onwards. Similarly, addition of biosimilars (like Trastuzumab, Adalimumab, Pegfilgrastim, Bevacizumab, etc.) for Emerging markets (like LatAm, MENA markets and South East Asia) are expected to provide growth impetus, going ahead. The wellness segment performance hinges upon the company's marketing & distribution prowess besides effective product positioning. India formulations business, after recent restructuring, is likely to stabilise. Both wellness, India formulations are likely to deliver steady growth in FY22. Overall, balance sheet reduction, Moraiya warning letter resolution, US base business performance in tough times are some important aspects to watch

Caplin Point Laboratories

Technical View

- The stock resumed a fresh up move after last five weeks of breather. It has rebounded taking support around Rs. 500 levels as it is the confluence of the previous breakout area and the 50% retracement of the previous rally (Rs. 305-686), thus offering a fresh entry opportunity to ride the next up move

- Earlier, during July 2020, it registered a resolute breakout above the long term falling supply line joining the highs since August 2017 signalling a structural turnaround and resumption of the primary up trend

- The stock has already taken more than five weeks to retrace just 50% of the previous four weeks strong volume based rally highlighting a higher base formation and a robust price structure

- Based on the above technical observations, we expect the stock to continue its positive momentum and head towards Rs. 710 levels as it is the 123.6% external retracement of the previous breather (Rs. 686-490) placed around Rs. 710 levels

Fundamental View

- Established in 1990 by first generation entrepreneur CC Paarthipan, the company as a matter of strategy focused on emerging markets of LatAm (Central and South America), Francophone and Southern Africa to cash in on the early mover advantage in the then untapped markets. Over the years, the company has established a strong and deeper presence in semi-regulated markets of Central America (CA) such as Guatemala, El Salvador, Nicaragua, Ecuador and Honduras among others

- After scripting a unique story by growing in uncharted territories, Caplin is looking at growth in known markets. These new markets of South America, US are a big opportunity but fraught with new challenges. That said, we continue to believe in Caplin's capability to replicate the success story in new markets. Secondly, despite likely dent in margins, return ratios due to investment phase in new markets, these prints continue to demonstrate earnings, balance sheet strength. By thriving in lesser known CA markets and cracking the most difficult US generic pharma code of injectables, that too in different therapies, Caplin has created its own identity with long drawn plans. The company continues to offer a compelling risk-reward scenario at current valuations.

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Source: Equity Bulls

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