While production is on, logistics is the key challenge both for raw material and finished goods. FDA delays remain a key uncertainty after logistics.
Pharma remains our preferred defensive play given limited earnings impact and valuation support. We cut large cap EPS by 1-7% as INR depreciation largely offsets impact of delays in production and launches. Logistics and FDA delays are the key risks. We cut multiples to below historical averages. SUNP remains our preferred pick where stock is factoring in distressed valuations for ex India business. Upgrade Cipla to Buy as risk-reward is favourable.
Logistics the key challenge
Our channel checks indicate that while production is on, logistics is the key challenge both for raw material and finished goods. Domestic market ordering is higher than usual in March as distributors/C&F are stocking but shipments is a challenge. Some companies have indicated that production shifts are reduced.
Earnings largely shielded; EPS down 1-7%
Our base case builds lockdown until April end and pharma output/sales normalising sharply in May/June. We cut FY21 India sales by 2% (April -20%) and delay US approvals/ launches by Q1-Q2. EPS impact though is lower across companies due to the sharp INR depreciation. Ex of INR the cuts for large caps would have been 12-15%. Mid cap EPS see sharper cuts due to leverage and higher impact of approval/tender delays.
FDA delays remain key uncertainty after logistics. With FDA inspections delayed and productivity lower, approvals will see delays. This will impact EPS for most companies.
Cash is king
Most large cap companies are net cash or low net debt. SUNP/NATCO have the most cash on books. SUNP has already announced a buyback and NATCO could do the same. SYNG/CIPLA/DRRD are near zero net debt. Among large caps Auro/Cadila/LPC are the most leveraged.
SUNP: Preferred play-Current price values ex India business at just 1x FY21 EV/Sales (India at 23x FY21PE) which are distressed valuations. We cut EPS by 2-4% as we factor in delay in specialty ramp-up. We retain Buy with revised PT of Rs 480 as we lower our multiple to 17.5x.
Cipla: Valuations factor in the risk-Cipla is trading at 10-year lows. At current prices it factors no growth across business. We upgrade to Buy with revised PT of Rs 450 (vs Rs 465) and value it at 16.5x FY22 PE, a 25% discount to historical valuations.
Syng/NATCO: Midcap picks- Among mid-caps, we continue to prefer SYNG and NATCO. We cut SYNG PT to Rs 300 (valuing at 23x FY22 PE). For Natco, we see strong growth ahead. Current stock price values India at 20x, RoW at 10x and US at 0.