Pharma shares to continue surging despite rich valuations; HSBC lists top stock picks

In 2021, HSBC sees export demand, benign regulatory outlook, and tailwinds from coronavirus vaccines to help domestic pharma stocks.

Even after pharma stocks witnessed a massive bull run in 2020 and valuations seem quite rich at this juncture, global investment bank HSBC expects the momentum to continue. “After four difficult years, the India pharma sector rallied in 2020, and we expect the benign operating environment to lead to another good year,” a recent report by HSBC said. In 2020, the Nifty pharma index soared 58% as investors latched on to defensive bets to cruise through the pandemic. In 2021, HSBC sees export demand, benign regulatory outlook, and tailwinds from coronavirus vaccines to help domestic pharma stocks.

Aurobindo Pharmaceuticals

Target price: Rs 1,200

Currently, the shares of Aurobindo Pharma are trading at Rs 915 apiece, translating to a 31% upside. A large product portfolio, highly integrated manufacturing base, potential benefits from supplying coronavirus vaccine are expected to be some of the positives for Aurobindo Pharma in 2021. “We believe the company remains on track to achieve its target of no long-term debt in the next two years; proceeds from the Natrol deal and internal accruals should support its capex and R&D programmes without any additional debt,” the report said. At the current rolling one-year forward PE of 15.6x, Aurobindo is trading at a 16% premium to its three-year average PE.

Biocon

Target price: Rs 560

Analysts at HSBC said the like Biocon for its favourable market positioning in biosimilars in the US and the EU. Along with biosimilars, the outlook for research services business and generics also remains strong. Significant market share gain with biosimilars, potential receipt of ‘interchangeable’ designation for Semglee from the FDA, and approval for bevacizumab are some catalysts to watch out for Biocon in 2021. The stock has tanked 9% on today on weaker than expected earnings, which may pave the way for an attractive entry point for investors.

Dr Reddy’s Lab

Target price: Rs 6,000

Dr Reddy’s is working to improve its sales in the United States and India by 50% in the next 2-3 years time. “We believe its consistent focus on strategic launches, portfolio synergies and cost optimisation should help it to sustain earnings growth. In the near term, Dr Reddy’s may see significant benefits from supplying COVID-19 vaccines,” the report said. Dr Reddy’s Lab is in agreement to supply 100 million Sputnik V covid-19 vaccine. Currently, the stock is trade at Rs 5,021 per share, translating to 19% upside potential.

Divi’s Lab

Target price: Rs 4,260

“The improved business on the back of progress in capex projects and the favourable industry tailwind – customer preferences for diversified sourcing, including the “China+1” strategy – should sustain the company’s momentum,” HSBC said. Divi’s Lab is trading at rolling one-year forward PE of 43.3x, however, analysts believe an improved business outlook justifies the valuations. From current levels, the stock needs to surge 19% to reach the target price.