Pharma stocks: Scope for further re-rating? Prefer Sun Pharma, JB Chemicals, says BNP Paribas

BNP Paribas in its latest sectoral note on pharmaceutical and healthcare sector said there was a slight miss in December quarter results but its earnings estimates stayed largely unchanged. Following a recent rally in the Nifty Pharma index, it has turned selective on pharma opportunities, even as the brokerage sees upside potential on a couple of healthcare services names.

The brokerage prefers Sun Pharmaceutical Industries Ltd (Sun Pharma) and JB Chemicals & Pharmaceuticals Ltd (JB Chemicals) in the pharma space and while it likes Apollo Hospitals Enterprise and Metropolis Healthcare Ltd in the healthcare services.

BNP Paribas likes the two pharma stocks considering the potential for shift in business mix towards less pricing sensitive segment and earnings growth in the core business, instead of upside from one-off opportunities

It said diagnostic companies are on stable course post improvement in competitive environment. Metropolis Healthcare is its top pick in India diagnostic as BNP thinks the company will continue to focus on improving the sales contribution of its B2C segment and expanding its network in regions where it currently does not have strong presence.

While it expects network expansion to continue in FY25 and hurt margins, the benefits will accrue from FY26 onwards as building collection centres around new labs is a slow process, BNP Paribas said.

"Valuation of Nifty Pharma Index has crossed 1SD above the 10-year historical average, following the recent 20 per cent rally (vs 12 per cent for NIFTY 50) over the last three months. However, we see little scope for further re-rating given we expect earnings growth to subside, which is currently led by one-time opportunities in the US. Valuation of hospital companies are near 2SD above their historical valuation, but we see scope of improvement given strength of existing business and aggressive bed expansion, which should start contributing from FY27 onwards," BNP Paribas said.

BNP Paribas said it has largely kept its aggregate FY25-26E earnings unchanged.

"At the aggregate level, for companies under over coverage, we raise our FY24E by 3 per cent to factor in 3QFY24 earnings beat, with up 22 per cent earnings revision of LPC. We lower Divis' FY24E earnings by over 12 per cent due to earnings miss," the domestic brokerage said.

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