UBS has initiated sell ratings on key Indian pharmaceutical stocks including Zydus, Dr. Reddy’s, Aurobindo, and Lupin, citing overestimated core margins and slow growth in their primary markets of India and the US. The brokerage believes the street is overly optimistic about the performance of these companies, which face challenges in achieving sustainable growth despite healthy balance sheets.
Key downgrades and price targets:
- Zydus Life Sciences (Target Price: Rs 850) and Dr. Reddy’s Laboratories (Target Price: Rs 5700): UBS highlights that the market is overestimating core margins for both companies, leading to the sell rating.
- Aurobindo Pharma (Target Price: Rs 1333): UBS has flagged high valuations despite low growth and a low return on capital employed (RoCE).
- Lupin (Target Price: Rs 2250): The brokerage noted that the stock is already pricing in one-off benefits expected in FY25 and FY26, which may not be sustainable over the long term.
UBS pointed out that the slowdown in growth in India and the US — two markets that account for 70-80% of sector profits — is under-appreciated by the street. This slowdown is expected to result in lower growth across the sector. Although balance sheets remain healthy enough to allow for investment in new growth drivers, UBS suggests that growth normalization may take longer than anticipated.
Preferred picks: Sun Pharma and Cipla UBS, however, remains bullish on Sun Pharma and Cipla, issuing buy ratings on both stocks:
- Sun Pharma (Target Price: Rs 2450): UBS expects Sun Pharma’s patented molecules to see revenues double over the next four years, accompanied by a 650 basis point margin expansion. This is expected to drive an earnings per share (EPS) compound annual growth rate (CAGR) of 19%.
- Cipla (Target Price: Rs 2060): UBS likes Cipla’s potential upside in the US market from its injectable and respiratory portfolios, which, according to the brokerage, has not yet been fully factored in by the market.
