The pharmaceutical sector saw strong growth in Q1FY25, with revenue rising by 11% year-over-year (YoY) and 4% quarter-over-quarter (QoQ), according to a report from Axis Securities. This growth was driven by a solid domestic market, new product launches like Darunavir and gSpiriva, less price erosion, better gross margins due to cost-cutting, and expanding the US market. EBITDA margins also improved, thanks to lower cost inflation and stable pricing.
India’s pharmaceutical market performed better than expected due to an expanded sales force, which led to higher volumes. Margins improved due to lower shipping costs and cheaper input materials. Hospitals also reported higher revenue per occupied bed (ARPOB), even though occupancy rates were seasonally lower.
Axis Securities highlighted Aurobindo Pharma Ltd, Krishna Institute of Medical Sciences Ltd (KIMS), and Lupin as top picks in the pharma sector, noting that the sector is back on a growth path.
Krishna Institute of Medical Sciences Ltd (KIMS) – Buy: Target Price ₹2,500
KIMS saw a drop in occupancy rates to 49.8% in Q1FY25, down 340 basis points (bps) YoY and 160bps QoQ. However, ARPOB increased by 21.3% YoY and 12.2% QoQ to ₹38,458, driven by a better mix of cash and insurance payments and a shorter average length of stay (ALOS) of 3.6 days.
Revenue in key areas like oncology, orthopedics, and gastric care grew by 36%, 14%, and 28% YoY, respectively. ARPOB for mature assets in Telangana and Andhra Pradesh also increased due to a better payer mix and lower ALOS.
Axis Securities sees a positive outlook for KIMS, expecting continued growth in ARPOB and additional bed capacity to boost cash flows, making it an attractive long-term investment.
Lupin – Buy: Target Price ₹2,200
Lupin’s growth outlook is supported by recent product launches in the US market, including Darunavir and gSpiriva, which have captured market shares (MS) of 30% and 32%, respectively. The company has also received approvals for Xyway (MS $958 million with 180 days of exclusivity) and Tolvaptan (MS $287 million), which could drive significant growth in the second half of the fiscal year.
Lupin is also expanding its sales force in India, expecting double-digit growth in its domestic business. The API (Active Pharmaceutical Ingredient) market is also seeing a resurgence, indicating accelerated growth for the company.
Aurobindo Pharma Ltd – Buy: Target Price ₹1,612
Axis Securities is optimistic about Aurobindo Pharma’s recently operationalized Vizag factory, which could play a key role in launching new injectable products. The company has invested ₹7,000 crore in capital expenditures over the past two years, focusing on areas like Biosimilars and Penicillin-G (API).
The return on invested capital (ROIC) from these significant investments is expected to impact Aurobindo’s valuation in the coming years. The company’s near-term growth will depend on its ability to overcome challenges in the injectable business while maximizing returns from its capital expenditures.
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