Best pharma stocks to buy in 2021

Since the outbreak of a much stronger and a deadlier second wave of COVID-19 infections, pharma stock have been buzzing on the Dalal Street. To fight back and contain the spread of the virus, the government on April 19 announced vaccination of all persons above the age of 18 from May 1. This made the sector even more investor friendly.

Commenting on the pharmaceutical sector, VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services said, “the market is driven by the hope that in this race between the pandemic and vaccination, the latter will ultimately win.”

Cadila Healthcare, Apollo Hospitals Enterprise, JB Chemicals & Pharmaceuticals, Neuland Laboratories, Cipla, Gland Pharma and Max Healthcare Institute hit their all-time highs in the week just gone by. Whereas companies like RPG Life Sciences, Vivimed Labs, Bal Pharma, Glenmark Pharmaceuticals, Sun Pharmaceutical Industries and Panacea Biotec touched their 52-week highs in the week ended April 23.

“Indian pharma – is all set for a structural value upgrade, led by a robust exports opportunity, supply chain de-risking by global pharma from China, strategic end-to-end integration, or led by PLI schemes, enhanced specialty drug efforts, and recovery of global pharma demand post covid. Also, the covid-led opportunities could be a catalyst in the near term,” stated Phillip Capital in a report.

The brokerage house is bullish on Aurobindo Pharma, IPCA Labs, Cadila Healthcare, Cipla, Sun Pharma, Lupin, Dr. Reddy’s Labs & Biocon.

Aurobindo Pharma | Target Price – Rs 1,250 | Upside – 25%
“Huge export opportunity in advanced markets, efficiency led by more integrated operations, upgrade in its portfolio, the PLI advantage, and potential vaccine opportunity. The company trades at an attractive valuation of 13x FY23 EPS and 7x FY23 EV/EBITDA, despite its efficient operating matrix, consistent earnings track record, and visible value progress. Additionally, the benefits from the covid vaccine and PLI approval would surprise earnings positively (because we have not yet factored these in our estimates), resulting in a re-rating,” mentioned the brokerage firm in the report.

IPCA Labs | Target Price – Rs 2,650 | Upside – 26%
“Robust export-led by the China-replacement theme; consistent domestic market outperformance (strong brand focus), and enhanced end-to-end manufacturing integration of a large part of its product portfolio. We build 36% earnings CAGR over FY20-23 to account for strong profitable and predictable earnings growth due to greater integration. We value IPCA at Rs 2,650, i.e., 22x FY23E EPS, as we expect it to sustain the strong growth momentum,” disclosed the report.

Cadila Healthcare | Target Price – Rs 600 | Upside – 4%
“Profitable progress in its key markets – US (upgrade in portfolio) and domestic business (enhanced focus on specialty); financial deleveraging (44% reduction in FY21); stable wellness business; strong EM growth outlook on the back of biosimilars launches. Incrementally, the covid vaccine opportunity remains a strong near-term catalyst (not factored into our model). We value Cadila Healthcare at Rs 600, i.e., at 22x FY23E EPS + PV of Rs 11 from vaccine, as we build 10%/21% sales/PAT CAGR over FY20-23,” noted the report.

Cipla | Target Price – Rs 1,080 | Upside – 15%
“Cipla will see profitable growth ahead led by strong US growth (gradual albuterol ramp-up and revlimid opportunity), profitable domestic business led by its respiratory franchise and covid portfolio, and strong exports momentum to EMs. Cost rationalization because of lower SG&A and R&D spending will aid margins in the near term. Pending regulatory action on Goa factory (which received a warning letter from the USFDA) remains a key risk. We value CIPLA at 23x FY23 EPS to arrive at a target of Rs 1,080,” said the report.

Sun Pharma | Target Price – Rs 750 | Upside – 18%
Phillip Capital believes that Sun Pharma will deliver good profitable growth, led by its increasing execution of the specialty portfolio globally (more importantly in the US) and strong growth in its high-margin domestic business. Steady EM/RoW in a post-covid world will also aid growth; we build 20% earnings growth over FY20-23. We value the company at Rs 750, i.e., 25x FY23 EPS, and expect margins to expand, led by lower SG&A and improving product mix. Revlimid settlement and Halol clearance could be additional re-rating catalysts.

Lupin | Target Price – Rs 1,200 | Upside – 12%
“Earnings CAGR of 34% over FY20-23 and value Lupin at Rs 1,200 (i.e., 23x FY23 EPS), implying a 17% upside. Factoring Spiriva, Brovana, and Dulera we raise our FY23 earnings by 17% and upgrade our rating,” stated the report.

Dr. Reddy’s Labs | Target Price – Rs 5,350 | Upside – 5%
“Stable U.S. sales led by gRevlimid. Strong domestic business led by the Wockhardt portfolio and contributions from new product launches. Steady traction in EMs led by a global commercialization of its products portfolio. Besides, its healthy balance sheet and improving return ratios bodes well in the near term. We maintain a BUY rating with a target of Rs 5,350 (23x FY23 EPS). Shifting focus away from the US could be earning dilutive in the long run – a key risk,” citied the report.

Biocon | Target Price – Rs 475 | Upside – 19%
Phillip Capital is of the opinion that Biocon is plagued by a weak near-term outlook led by slow progression of biosimilars, delay in new approvals, and inspection delays for Syngene in covid times, we have cut our FY22/23 estimates by 8%/3%.

While investors are gung-ho on pharma stocks Vishal Manchanda, Research Analyst with Nirmal Bang Institutional Equities Research is cautious about the current rally in the pharma sector. “During the first wave pharma stocks rallied in a similar manner but once the cases subsided pharma stocks consolidated. Even this time pharma stocks can consolidate once the second wave peaks out and smart money will move out of the pharma sector and enter other beaten-down sectors,” said Manchanda.

(Disclaimer: The recommendations in this story are by the respective research or brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)