Healthcare Sector In India Enters A Golden Phase, Says DAM Capital's Nitin Agarwal
Agarwal prefers healthcare companies focusing on exports rather than specialty chemicals players.
The healthcare sector in India is going to be a structural story with the demand-supply gap in favour of suppliers. The country is going through a golden phase in the space from an earnings perspective, according to Nitin Agarwal, the head of institutional equity research at DAM Capital Advisors Ltd.
Domestic demand continues to be strong and exports have rebounded strongly. Earnings erosion, which was hurting the US businesses, has stabilised and there are a lot of big-ticket opportunities that are being capitalised by large companies over the last few quarters, Agarwal told NDTV Profit's Niraj Shah in an interview. "These tailwinds will continue for the next four to five quarters. So, the sectors will be in a very healthy shape from an earnings perspective, especially the companies which got the US tailwind," he said.
The current revlimid demand cycle is an unusual opportunity, according to the DAM Capital managing director. "We haven't seen an opportunity of this size coming simultaneously for so many players."
Agarwal prefers healthcare companies focusing on exports rather than specialty chemicals players. The strongest business in export is Aurobindo Pharma Ltd., which is his top pick in the sector. "We also like companies like Lupin Ltd. and Zydus Lifesciences Ltd., which have got a lot of approvals and have clean track records on the regulatory side in the last few quarters."
Valuation multiples are high, but the expectation is earnings should take care of them, he said. "We are looking at compounding stories from hereon, unless and until anything dramatic happens on a regulatory front."
Watch The Interview Here
We've had select companies come out thus far, the larger bunch is yet to come. Are we looking at a bit of a transition period for Healthcare companies because some sects of healthcare and Pharma have done very well, some have not, over the last 12 months?
Nitin Agarwal: We have been going through a little bit of a holding phase for a sector from an earnings perspective. Largely because domestic continues to be okay and exports have come back very strongly. Partly because the pricing erosion which was hurting the businesses in the U.S. has stabilised and more importantly, there are a lot of big ticket opportunities like Revlimid which have been to crystallise for a bunch of companies, especially for most of the large cap companies over the last few quarters. I think this will continue and the Revlimid tailwind will continue at least for the next four to five quarters. So at least for the next four or five quarters the sector is in a very healthy shape from a reported earnings perspective, especially the ones who have got the U.S. tailwind.
Got it. Typically, because the markets tend to discount three, six months, nine months in advance you still think that time is some time away. I heard you say four or five quarters of tailwinds still exist?
Nitin Agarwal: Yes and specifically on revlimid because this is an unusual opportunity. I mean, you haven't seen an opportunity of this size coming simultaneously for so many players at the same time. My sense is by Q2 of FY 2026, it will be behind us. I mean it probably won't be meaningful beyond that. So I guess another six quarters are left for reported earnings to look good. At some stage during the year a market will start to get worried about the post Revlimid life for a lot of our companies where the revlimid tailwinds are there.
Nitin, from among the Pharma companies, you know, US FDA action was very hot. In the last 12 months, we've seen a number of companies get observations as well. Maybe one or two like Lupin have largely remained unscathed. Just trying to understand what's the pecking order at DAM Capital when it comes to at least the U.S. generic exporting companies?
Nitin Agarwal: From a pure generic exporter, and I keep the specialty companies like Sun Pharma out of it. The strongest businesses on generic exports are companies like Aurobindo as a top pick in the generic export businesses, the most strongest generic franchise and then you also like companies like Lupin and Zydus which have got a lot of things falling in place for them in terms of very recent approvals, good quality approvals coming through and as you mentioned and a recently clean track record on the regulatory side over the last few quarters, which gives them a significant clarity on the new product launches also on a going forward basis. So the pecking order would be Aurobindo, Lupins and Zydus, as the relatively preferred names amongst the large caps.
Got it, okay. I'll come to CDMO at the end because we got the management of Laurus Labs post that but before I come on CDMO, the other aspects of Healthcare we've seen hospital companies, how do I say for lack of a better word, caught between a rock and a hard place in certain times in terms of regulatory moves, but the the earnings and the stock price performance hasn't been too bad. What's your sense about how to play this theme?
Nitin Agarwal: So you're right about the hospitals (segment). I think structurally from an earnings perspective, the business is in a very, very good shape. The uncertainty which has come in is because of the potential regulatory activity which can happen in the space. At this point of time, we don't have any clarity on what can happen and in which shape and form it can happen. I mean even if I keep that out because we don't know what could be the contours of any regulatory action if assuming it comes through. I think businesses from an earnings perspective are fine. I think our view is that Healthcare India is a structural story because the demand supply gap essentially is in favour of suppliers, the country is ageing, the country is becoming richer and only as many quality hospital beds are out there.
So structurally it is a brilliant story, earnings their quality hospital better or their larger structure needs? So it's a brilliant story, earnings will keep coming through the sector barring anything which happens on the regulatory side. So if we just keep that aside, and the other part, which you mentioned that already happened is earnings have multiples have got re-rated meaningfully for the hospital business over the last 12 to 18 months especially post Covid. So there is a relatively limited upside possible on the multiple re-rating. But I guess we are looking at compounding stories from hereon unless something very dramatic happened on the regulatory front. So that is the way we look at it. No more earning upgrades, no more P/E re-rating, but consistent earnings stories from hereon.
Then I come to CDMO and we've seen a couple of companies come out with numbers, they're not just pure play CDMO companies, Syngene and Laurus. What are your thoughts on that longer term aspect, of course, and then coupled up with how did you view the earnings and the commentary of both Laurus and Syngene, if you cover them?
Nitin Agarwal: I'm personally pretty positive on the CDMO space and I guess this tailwind which is coming from the Biosecure Act implementation is going to help the sector. But in general, I guess, companies have been working in CDMO or select companies that have been working in CDMO for quite some time. I think we're getting to a point where I don't see News flows across companies. It started with Divi’s Lab as the flag bearer for the CDMO story in India and we've seen other companies sort of coming through and having meaningful acquisition to the CDMO businesses franchises coming through.
My sense is we'll probably see more and more of it as we go along. More companies are getting commercial contracts from innovators both on small molecules as well as biologics and the Chinese in any sort of disruption to China, any sort of partnerships, because the Biosecure Act will be for the tailwind. The point here is that Pharma companies need to incrementally value barring domestic and generic exports from being participating in the innovation value chain. Either companies do innovation on their own, like somebody somebody like Sun Pharma or somebody people bring innovation, their own NC proprietary research or the other way out is you partner with innovators who are doing the proprietary R&D. and I guess, we see a lot of opportunities incrementally building up in this space as we go along.
Okay, do you have coverage on the ones that have come up with results thus far there is Syngene. Again, not necessarily just CDMO but came up with numbers and the guidance. Laura's yesterday came out with numbers and guidance. Do you have individual coverage on any of these?
Nitin Agarwal: We cover Laurus and Syngene, we sort of track it as a part of Biocon and these are very different business models and Syngene is still a CRO heavy business while Laurus is predominantly a CMO. I mean, there are some challenges which have been there in the last few quarters, you know, around lack of funding or reduced funding for biotech, which has impacted the CRO part of the business across the landscape. But CMO continues to be in good shape. I guess that's reflected in the way Syngene got reported. Even Laurus, you know, they were relatively late starters in the business and then they have a long way to go from here and they are from whatever the guidance management has put out. Whatever commentary is there, it seems a pretty promising road ahead for Laurus on the CDMO front.
Just the last question here: valuations, do they worry you or do you reckon earnings growth could take care of it? What's the call out there on both Syngene and Laurus in particular?
Nitin Agarwal: I mean, my sense is there is a lot of expectation around the earnings pickup coming through the opportunity space,is very large, earnings can really grow meaningfully to the extent you know, management can deliver on the promise which is there in these businesses. So as you said, you know, earnings multiples are high, but the expectation of earnings should take care of them as we go along with the next two. to three years.
