CLSA Names Apollo Hospitals Top Pick, Sees Pharma Growth

resr 5paisa Research Team

Last Updated: 23rd January 2025 - 04:07 pm

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CLSA, a global brokerage firm, has released its 2025 outlook for India's healthcare sector, projecting an 8-9% growth in the Indian pharmaceutical market, slightly ahead of the expected growth in the U.S. market. The brokerage has identified Apollo Hospitals, Max Healthcare, and Dr Lal PathLabs as its top investment choices, favoring companies with strong domestic exposure and a significant presence in the hospital and diagnostics segments.

The report highlights rising competition in the generic drug market and mid-single-digit price erosion, which could create challenges for Indian pharmaceutical companies. Major drugmakers like Dr Reddy's Laboratories, Zydus, and Cipla may face pricing pressures due to intense competition for key medications. 

However, CLSA prefers companies with a stronger focus on domestic operations, hospitals, and diagnostic services, as they offer more stable revenue streams compared to traditional pharmaceutical firms, which are vulnerable to regulatory changes and pricing fluctuations. The broader healthcare sector in India continues to witness structural growth, fueled by greater health awareness, increased insurance penetration, and hospital network expansions. 

The diagnostics industry, in particular, is positioned for steady growth, supported by higher test volumes, increasing preventive healthcare adoption, and advancements in pathology and radiology.

In its stock-specific recommendations, CLSA downgraded Dr Reddy’s Laboratories from Hold to Underperform, reducing its target price to ₹1,090 from ₹1,140, citing growing competition for key generic drugs. On the other hand, Aurobindo Pharma was upgraded from Hold to Outperform, though its target price was revised downward to ₹1,400 from ₹1,540, as CLSA views it as relatively well-positioned for growth, supported by new product launches and a diversified portfolio. 

Dr Lal PathLabs also received an upgrade from Hold to Outperform, with its target price increasing to ₹3,240 from ₹3,110. The brokerage attributes this to strong volume growth and stable pricing, which reinforce its positive outlook.

Dr Lal PathLabs’ stock has declined 22% since its October 2024 peak, primarily due to concerns over profit margins in the second half of 2025. However, CLSA believes this correction is overdone, considering the company’s dominant position in northern India, aggressive expansion strategy, and ongoing operational improvements. The firm expects profitability to improve as new laboratories stabilize, leading to higher efficiency and better margins. It also highlights that Dr Lal PathLabs is currently trading at a discount compared to its peers, making it an attractive investment opportunity.

Looking ahead, CLSA remains bullish on India’s healthcare sector, particularly diagnostics, where market consolidation, brand trust, and increased demand for preventive healthcare are expected to drive long-term growth. The overall healthcare industry is poised for expansion, supported by rising incomes, government initiatives to improve healthcare access, technological advancements in medical diagnostics and telemedicine, and the growing adoption of health insurance. 
Given these trends, CLSA maintains an optimistic yet selective stance, preferring domestically focused healthcare companies with sustainable revenue models, strong brand positioning, and significant growth potential.

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