Q1'25 Spotlight (Indian Pharma) - 10 Top performing stocks that are undervalued

Top 10 Undervalued Pharma Stocks based on Q1'25 results are Cipla, Zydus Lifesciences, Dr. Reddys Labs, Aurobindo Pharma, Natco Pharma, FDC - Fair deal corporation, Aarti Pharma labs and 3 more.

Disclaimer - We are not SEBI registered !! Nothing that you will read below is investment advice. We are sharing “High Performing stocks that are Undervalued” based on Q1’25 performance in Pharma (Bulk drugs and Formulations) Sector with you, for you to do deeper research.

NIFTY Pharma Returns as compared to NIFTY

If we see returns for the last 2 years, NIFTY Pharma started outperforming NIFTY since July 23 and since Sept 22 has given returns of 82% vs NIFTY 47%

What is happening fundamentally in Pharma (Bulk Drugs and Formulations) in Q1 25 i.e. from April 24 to June 24

When multiple companies in a sector show Increase in Sales and OPM in a quarter… it usually indicates that there are strong tailwinds in the sector. This generally results in multiple companies in that sector out performing Fundamentally and Price wise.

For Pharma (Bulk Drugs and Formulations) - Out of 46 Companies over the market cap of 1000 Cr

1. 20 Companies grew their Sales and Profits by 5% Quarter on Quarter in Q1 25 i.e. compared with Q4 2024

2. 6 Companies grew their Sales and Profits by 15% Year on Year i.e. compared with Q1 2024

Also you will notice that for most of the companies mentioned below (The 10 Best performing Pharma stocks that are undervalued) -

1. All 4 metrics

   1. Revenue per quarter

   2. Gross Profit Margin per quarter

   3. Operating Profit Margin per quarter

   4. Net Profit Margin per quarter

   5. Started improving around Q4 2023 i.e. from Jan 23 to March 23

2. That is the same time we saw the Price of these companies also starting to move upwards with Company fundamentals

The reasons for the above fundamental outperformance (sector Tailwinds) are -

1. Strong US market growth driven by complex generics and specialty products

2. Expanding biosimilars pipeline and increasing launches in regulated markets

3. Growing opportunities in emerging markets, diversifying revenue streams

4. Improving profitability through better product mix and operational efficiencies

5. Increasing CDMO/CMO business opportunities, particularly in the global context

Check out the last section of the newsletter to see which sectors will we cover next…

10 Undervalued Pharma Stocks that were the Best Performers listed by Decreasing Market Cap

Cipla - Market Cap 1,30,000+ Cr

1. Price Action - Since Sept 22, CIPLA - 60%, NIFTY 46%

   

2. Operational metrics performance - Below chart shows Revenue, Gross, Operating and Net Profit Margin improving quarterly since Feb 2023

   

   1. Q1 25 results (QoQ Increase) - Sales increased by 9% and Profits increased by 16%

   2. Q1 25 results (YoY increase) - Sales increased by 6% and Profits increased by 9%

3. Valuations and EPS - Below chart shows Price and TTM EPS (EPS of last 4 quarters) have grown at the same speed since March 23 leading to valuations consistent at 30 PE

   

   1. PE consistent at 30 i.e. historical average

   2. TTM EPS (EPS of Last 4 quarters) - Growing consistently QoQ since Dec 2022

4. What led to outperformance

   1. US Business -

      1. North America reached all-time high quarterly revenue of $250 million, up 13% YoY

   2. India Business

      1. Branded prescription business grew 10% YoY

   3. Gross Margin

      1. Improved to 67.2%, up 226 basis points YoY due to better product mix

   4. R&D Expenses

      1. Currently at 5.3% of revenue, lower than usual

   5. Product Portfolio

      1. Launched generic version of Lanreotide injection; Albuterol market share increased to 17%

   6. Manufacturing & Regulatory

      1. Patalganga and Kurkumbh facilities classified as VAI by US FDA

   7. Future Pipeline

      1. Multiple peptide launches planned in coming quarters

Zydus Lifesciences - Market cap 1,06,000+ Cr

1. Price action - Since Sept 22, ZydusLife - 184%, NIFTY 46%

   

2. Operational metrics performance - Below chart shows Revenue, Gross, Operating and Net Profit Margin improving quarterly since Feb 2023

   

   1. Q1 25 results (QoQ Increase) - Sales increased by 12% and Profits increased by 50%

   2. Q1 25 results (YoY increase) - Sales increased by 21% and Profits increased by 15%

3. Valuations and EPS - Below chart shows Price and EPS have grown at the same speed since Dec 22 leading to valuations averaging around 25 PE

   

   1. PE 25 - near historical average

   2. TTM EPS (EPS of Last 4 quarters) - Growing consistently QoQ since Dec 2022

4. What led to outperformance

   1. Revenue Growth

      1. Consolidated revenues up 21% YoY to Rs. 62.1 billion

   2. US Business

      1. Reached all-time high quarterly revenue of $250 million

   3. India Business

      1. Branded formulations grew 13% YoY, outpacing market

   4. Profitability

      1. EBITDA margin improved to 33.6%, up 430 bps YoY

   5. Product Pipeline

      1. Launched 7 new products in US, including Zituvimet

   6. R&D

      1. Completed patient recruitment for key clinical trials

   7. Cash Position

      1. Deleveraged balance sheet by repaying entire debt

Dr. Reddys Laboratories - Market Cap 1,10,000+ Cr

1. Price action - Since Sept 22,Dr Reddy - 55%, NIFTY 46%

   

2. Operational metrics performance - Below chart shows Revenue, Gross, Operating and Net Profit Margin improving quarterly since Sept 2022

   

   1. Q1 25 results (QoQ Increase) - Sales increased by 8% and Profits increased by 6%

   2. Q1 25 results (YoY increase) - Sales increased by 14% and Profits decreased by 9%

3. Valuations and EPS - Below chart shows EPS growth has moved faster than price growth since Feb 23 leading to a PE derating

   

   1. PE 20 - below historical average

   2. TTM EPS (EPS of Last 4 quarters) - Growing consistently QoQ since Dec 2022

4. What led to outperformance

   1. US Business

      1. North America Generics revenues up 19% YoY to $463 million

   2. Gross Margin

      1. Improved to 60.4%, up 170 bps YoY

   3. EBITDA

      1. Up 15% QoQ to Rs. 2,160 crores, margin at 28.2%

   4. R&D Expenses

      1. 8.1% of sales, focused on biosimilars and complex generics

   5. New Initiatives

      1. Acquisition of Nicotinell® and related NRT brands

   6. Biosimilars

      1. Denosumab and abatacept in pipeline for future launches

Aurbindo Pharma - Market Cap 86,775+ Cr

1. Price action - Since Sept 22, Aurobindo Pharma - 192%, NIFTY 51%

   

2. Operational metrics performance - Below chart shows Revenue, Gross, Operating and Net Profit Margin improving quarterly since Dec 2022

   

   1. Q1 25 results (QoQ Increase) - Sales by 0% and Profits by 43%

   2. Q1 25 results (YoY increase) - Sales by 10% and Profits by 27%

3. Valuations and EPS - Below chart shows EPS and Price growth has moved together since July 23 keeping the PE stable around 25

   

   1. PE 25 - above historical average

   2. TTM EPS (EPS of Last 4 quarters) - Growing consistently QoQ since July 2023

4. What led to outperformance

   1. Revenue Growth

      1. Topline growth of 10% YoY to Rs. 7,567 crores

   2. US Business

      1. Revenue of $426 million, 12% YoY growth

   3. Europe Business

      1. Strong performance with €221 million revenue

   4. EBITDA Margin

      1. Maintained at 21.4%, in line with expectations

   5. Pen-G Plant

      1. Expected to ramp up significantly from October'24

   6. Regulatory Issues

      1. Remediation costs expected to reduce significantly in Q2

   7. Biosimilars Pipeline

      1. Progress in clinical trials, filings expected from next year

   8. Revlimid

      1. Continued contribution to revenue

   9. API Business

      1. 6% YoY growth to Rs. 1,092

Natco Pharma - Market Cap 25,318 + Cr

1. Price action - Since Sept 22, Natco Pharma - 137%, NIFTY 46%

   

2. Operational metrics performance- Below chart shows Revenue, Gross, Operating and Net Profit Margin improving quarterly since Feb 2023

   

   1. Q1 25 results (QoQ Increase) - Sales by 28% and Profits by 71%

   2. Q1 25 results (YoY increase) - Sales by 19% and Profits by 28%

3. Valuations and EPS - EPS growth has moved faster than price growth since Jun 23 leading to a PE derating

   

   1. PE 16 - below historical average

   2. TTM EPS (EPS of Last 4 quarters) - Growing consistently QoQ since Jun 2023

4. What led to outperformance -

   1. Revenue Growth

      1. Consolidated revenue up 21.6% YoY to INR 1,410.7 crores

   2. Profitability

      1. Net profit up 59% YoY to INR 668.5 crores

   3. US Business

      1. Strong performance in export formulations

   4. Domestic Business

      1. Stable at INR 100 crores per quarter; double-digit growth expected for the year

   5. Product Pipeline

      1. Potential opportunities in Semaglutide, Olaparib, and Erdafitinib

   6. Agro Business

      1. New business with potential for growth

   7. Cash Position

      1. About INR 2,000 crores cash in books

Fair Deal Corporation - Market Cap 9,245+ Cr

1. Price Action - Since Sept 22, FDC - 102%, NIFTY 46%

   

2. Operational metrics performance- Below chart shows Revenue, Gross, Operating and Net Profit Margin improving quarterly since Jan 2023

   

   1. Q1 25 results (QoQ Increase) - Sales by 38% and Profits by 63%

   2. Q1 25 results (YoY increase) - Sales by 19% and Profits by 1%

3. Valuations and EPS - Below chart shows EPS and Price growth has moved together since April 23 stabilising the PE at 29

   

   1. PE 29 - above historical average

   2. TTM EPS (EPS of Last 4 quarters) - Growing consistently QoQ since April 2023

4. What led to outperformance

   1. No Q1 25 Concall published

Aarti Pharma - Market Cap 5,777+ Cr

1. Price Action - Since Sept 22, Aartipharm - 111%, NIFTY 46%

   

2. Operational metrics performance- Below chart shows Revenue, Gross, Operating and Net Profit Margin improving quarterly since July 2023

   

   1. Q1 25 results (QoQ Increase)- Sales by 10% and Profits down by 1%

   2. Q1 25 results (YoY increase) - Sales increase by 21% and Profits down by 6%

3. Valuations and EPS - Below chart shows Price growth is faster than EPS growth since March 24 leading to PE increasing to 25.6

   

   1. PE 25.6 - above historical average

   2. TTM EPS (EPS of Last 4 quarters) - Growing consistently QoQ since Dec 2023

4. What led to outperformance

   1. Revenue Growth

      1. Consolidated top line up 27% YoY to Rs. 555 crores

   2. Xanthine Derivatives

      1. Contributed 54% of turnover; international revenues growing

   3. CDMO/CMO Business

      1. 53 active projects with 18 customers; 25-30% Y-o-Y growth expected in FY25

   4. API and Intermediates

      1. Contributed 44% of turnover; 55% from regulated markets

   5. Capacity Expansion

      1. Xanthine capacity to reach 9000 MT by FY26 ; Atali project to add 500 KL capacity

   6. Margins

      1. Consolidated EBITDA up 14% YoY to Rs. 96.4 crores

   7. Regulatory Environment

      1. Biosecure Act in US driving more inquiries from non-Chinese suppliers

   8. Solar Power Plant

      1. New plant at Akola to generate 1/3rd of power requirement

Granules - Market Cap 13,648 + Cr

1. Price Action - Since Sept 22, Granules - 71%, NIFTY 46%

   

2. Operational metrics performance- Below chart shows Revenue, Gross, Operating and Net Profit Margin improving quarterly since July 2023

   

   1. Q1 25 results (QoQ Increase) - Sales increase by 0% and Profits increase by 8%

   2. Q1 25 results (YoY increase) - Sales increase by 20% and Profits increase by 58%

3. Valuations and EPS - Below chart shows Price growth is faster than EPS growth since Nov 23 leading to PE increasing to 26

   

   1. PE 26 - above historical average

   2. TTM EPS (EPS of Last 4 quarters) - Growing slightly QoQ since Dec 2023 and then sharp increase in Q1 25

4. What led to outperformance

   1. Revenue Growth

      1. Overall revenue up 20% YoY to Rs. 11,799 million

   2. Formulations Business

      1. FD sales contribute 76% of revenue, up from 65% in FY24

   3. US Market Performance

      1. North America sales grew 45% YoY

   4. New Products

      1. Sales from new products beyond legacy five contribute 35% of revenue

   5. Gross Margins

      1. Improved to 58.9% from 51.4% in Q1 FY24

   6. EBITDA

      1. Rs. 2,593 million, 22% of sales, up 89% YoY

   7. Capacity Expansion

      1. New formulation facility at Genome Valley commenced operations

   8. Pipeline Development

      1. Progress in oncology, ADHD, and enzyme technology platforms

   9. OTC Business

      1. Contributes 15% to overall sales, growing in strong double digits

Advanced Enzymes - Market Cap 5,772 + Cr

1. Price Action - Since Sept 22, Advanced Enzymes - 80%, NIFTY 46%

2. Operational metrics performance - Below chart shows Revenue, Gross, Operating and Net Profit Margin improving quarterly since Jan 2023

   1. Q1 25 results (QoQ Increase) - Sales increased by 2% and Profits increased by 13%

   2. Q1 25 results (YoY increase) - Sales increased by 5% and Profits increased by 11%

3. Valuations and EPS - Below chart shows Price and EPS growth was same from April 23 till July 24 then price escalated leading to PE increasing to 40

   

   1. PE 40 - above historical average

   2. TTM EPS (EPS of Last 4 quarters) - Growing consistently QoQ since April 2023

4. What led to outperformance

   1. Revenue Growth

      1. Overall revenue up 5% YoY to INR 1,545 million

   2. EBITDA

      1. Up 16% YoY to INR 512 million; 33% margin

   3. Segment Performance

      1. Bio-processing grew 12% YoY; Animal Nutrition up 9% YoY

   4. US Market

      1. Strong growth in US sales, up from INR 422 million to INR 494 million YoY

   5. New Products

      1. 50 products in pipeline; some in final stages

   6. Capacity Utilization

      1. Currently at 60-65%

   7. R&D Investments

      1. Spent INR 76 million (4% of sales) on R&D

   8. Margins

      1. Expecting 33-34% EBITDA margins for the year

   9. Growth Outlook

      1. Targeting 12-15% growth for FY25

   10. International Expansion

       1. Focusing on US market for new product launches

KOPRAN - Market Cap 1,656 + Cr

1. Price action - Since Sept 22, Kopran - 102%, NIFTY 48%

   

2. Operational metrics performance - Below chart shows Revenue, Gross, Operating and Net Profit Margin improving quarterly since July 2023

   

   1. QoQ Increase - Sales down by 25% and Operating Profit Margin increase by 39%

   2. YoY increase - Sales increase by 19% and Operating Profit Margin increase by 142%

3. Valuations and EPS - EPS growth faster than price leading to PE stablising around 28

   

   1. PE 28 - above historical average

   2. TTM EPS (EPS of Last 4 quarters) - Growing consistently QoQ since Nov 2023

4. What led to outperformance

   1. Revenue Growth

      1. Consolidated turnover up 19% YoY to Rs. 139.43 crores

   2. Profitability

      1. Consolidated profit up significantly to Rs. 11.10 crores from Rs. 2.77 crores YoY

   3. API Business

      1. Turnover increased to Rs. 89.83 crores from Rs. 73.86 crores YoY

   4. Formulations Business

      1. Turnover increased to Rs. 49.61 crores from Rs. 43.29 crores YoY

   5. Panoli Plant

      1. Environmental clearance received; production to start in next few months

   6. New Product Development

      1. Validation batches for new formulations like Rivaroxaban, Empagliflozin, Sitagliptin

   7. Capacity Expansion

      1. Plans for vial filling line for Penems; forward integration

   8. Margin Outlook

      1. EBITDA margin improved to 13% from 12% last year; targeting 14-15% for FY25

   9. Long-term Growth

      1. Targeting revenue of 1,200-1,300 crores in 4-5 years

   10. Product Concentration

       1. Top 5 molecules contribute 50-55% of revenue

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Thank you for going through these 10 ideas that you can research further to invest.

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