3 Pharma Stocks Sharekhan Is Positive About

Leading brokerage firm Sharekhan is positive on three pharmaceutical stocks - Abbott India Ltd, Cipla Ltd, and Divis Laboratories Ltd. The brokerage house believes that the price will rally significantly between 6% to 18%. All companies reported mixed results for the fourth quarter. The details are given below.

1. Buy Abbot India shares at a Target price of Rs 25,243 (17.57% potential upside)
Abbott India Limited (Abbott) reported weaker-than-anticipated net income in Q4FY2023. The gross margin declined ~273.0 bps y-o-y to ~43.4% and the EBITDA margin declined ~256 bps y-o-y to ~20.9% in Q4FY2023. PAT grew at a slower pace of ~9.5% y-o-y to Rs 231.4 crore though, which was lower than the stock-broking firm's estimate of ~Rs. 275 crore.

The EBITDA margin contraction can be attributed to an unfavorable product mix, increased raw-materials cost, and higher other operating expenses (~13.1% of sales in Q4FY2023 vs. ~11.9% in Q4FY2022), while employee costs reduced (~9.4% of sales in Q4FY2023 vs. ~10.8% of sales in Q4FY2022). Hence, operating profit or EBITDA declined by ~4.7% y-o-y to Rs. 280.1 crores, pointed Sharekhan.

Additionally, the company has declared a special dividend of Rs. 145 and a final dividend of Rs. 180 for FY2023, indicating a dividend yield of ~1.6%.

However, Abbott's strong market leadership in its key therapy product categories such as gastro and gynecology continues to be the key positive. "We maintain Buy with an unchanged price target of Rs. 25,243. The stock currently trades at 41.4x/35.6x its FY2024E/FY2025E EPS." added the broking firm.

2. Hold Cipla Ltd shares at a target price of Rs 1,030 (9.81% potential upside)
Cipla's Q4FY2023 numbers were a mixed bag as it outperformed Sharekhan's expectations on the revenue front with revenue of ~Rs. 5,739 crore was above the estimate of Rs. 5,565.1 crore. While EBITDA came in line at ~Rs. 1,174 crore vs. the estimate of Rs. 1,169 crore and the adjusted PAT was at ~Rs. 653.7 crore, slightly below the estimate of ~Rs. 673.0 crore.

However, some of Cipla's key facilities continue to languish under the USFDA scanner such as Indore and Goa. Also, the company's India segment revenue continues to grow at a tepid pace due to the high base effect associated with COVID-19 sales.

Besides, the R&D spend is expected to continue to rise due to a likely increase in spend on a differentiated portfolio of products and biosimilars, which restricts the likelihood of EBITDA margin expansion over the short-medium term.

Hence, Sharekhan says "We reduce the price target to Rs. 1030 (vs. before Rs. 1,080) and maintain HOLD on it as it trades at ~22.0x and ~19.0x its FY24 and FY25E EPS estimates vs. peers trading at ~18.3x and ~16.1x its FY24E and FY25E EPS estimates, indicating higher valuation."

3. Buy Divis Laboratories Ltd shares at a target price of Rs 3,600 (6.41% potential upside)
Divis Labs reported in-line results for Q4FY23 on the profit front. In Q4FY23, revenues declined ~22.5% y-o-y (up 14.2% q-o-q) to Rs. 1,951 crores (vs. the internal estimate of Rs 1,765 crore and consensus estimate of Rs 1,792 crore) this was driven by a ~6.3% y-o-y/~12.0% q-o-q rise in generic APIs sales (~59.0% of revenue) and ~44.3% y-o-y decline and ~17% q-o-q rise in custom synthesis revenue (~41.0% of revenue) in Q4FY23.

The gross profits fell ~33.1% y-o-y to Rs. 1,123 crore and gross margins declined ~912.0 bps y-o-y to ~57.6% in Q4FY23. EBITDA declined ~ 55.9% y-o-y to Rs. 488 crores (versus the internal estimate of Rs. 476 crores and the consensus estimate of Rs. 477 crores.)

The decline was due to a ~1.9% points decline in EBITDA margins to ~25.0% (versus internal estimate of ~27.0% and consensus estimate of ~26.6%) Net profits declined ~64.1% y-o-y (+4.6% q-o-q) to Rs. 321 crore (vs. internal estimate of Rs. 344 Cr and consensus estimate of Rs. 347 crore.)

The company has invested heavily in existing and new generic molecules' capacity expansion, backward integration, and custom synthesis segment. Another ~Rs 1200-1,500 crore is slated to be invested in the Kakinada III unit, which is likely to be commissioned by ~FY26-FY27.

Sharekhan feels that the margins are expected to continue to lag behind historical averages and normalise by ~FY26-27, as incremental sales come in from new generic and custom synthesis and contrast media APIs.

"We upgrade our Hold rating on Divis Laboratories (Divis) to Buy with a revised PT of Rs 3,600. The stock has corrected by ~21% over the last year and trades at ~38.6x and ~34.2x its FY2024/25E earnings versus peers that are trading at ~21x/17.1x its FY24/FY25 EPS estimates. It deserves premium valuations, as it clocks superior return ratios as compared to peers." the stock-broking firm added.

Disclaimer
The stocks have been picked up from the brokerage reports of Shraekhan. Greynium Information Technologies, the author, or the brokerage firm will not be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.