Morgan Stanley initiates on India’s top four Pharma stocks but only one is an ‘overweight’

Morgan Stanley has initiated coverage on India’s four largest pharmaceutical companies by market capitalisation — Sun Pharmaceutical Industries, Lupin, Dr. Reddy’s Laboratories (DRL), and Cipla — collectively referred to as the “P4.”Looking at the earnings growth, quality of growth, a chronic-focussed India business, strong balance sheet and a healthy speciality pipeline, the brokerage sees Sun Pharma as the leader among the P4 and has assigned it the only ‘Overweight’ rating.
Morgan Stanley has a price target of ₹1,960 on Sun Pharma, implying a 17% upside from Friday’s closing levels.
The foreign brokerage has initiated coverage on Lupin with an ‘Equalweight’ rating and a price target of ₹2,096. It expects Lupin to have a strong first half of FY26 but US competition risk in key products later on will be a challenge.FY26 will be a transition year for both Dr. Reddy’s and Cipla as revenue from the highly profitable gRevlimid starts to taper off. However, Semaglutide ramp-up could be an upside surprise. As a result, Morgan Stanley is ‘Equalweight’ on the stock with a price target of ₹1,298.

Morgan Stanley has initiated coverage on Cipla with an ‘Underweight’ rating and a price target of ₹1,400, which implies a 6% downside for the stock. The brokerage is expecting Cipla’s Earnings Per Share to have a negative 2% EPS Compounded Annual Growth Rate (CAGR) over financial year 2025-2027.

According to Morgan Stanley, the P4 are in the midst of a strategic shift from volume-driven generics to value-led portfolios, with greater emphasis on specialty, complex generics, and biosimilars.

Sun Pharma is scaling its global specialty engine, while Lupin benefits from strong execution and a differentiated pipeline. Dr. Reddy’s is navigating the gRevlimid cliff with strategic positioning on Semaglutide and biosimilars, while Cipla is expanding in respiratory and chronic therapies.While overall earnings growth is moderating, the brokerage believes the companies’ robust balance sheets will support the next phase of investment.

Between FY22 and FY25, the P4 delivered an average revenue CAGR of 11% and net income CAGR of 56%, along with margin expansion and balance sheet improvement.

Though long-term prospects appear sound, near-term earnings visibility remains limited for DRL, Cipla, and Lupin, whereas Sun Pharma stands out due to its stronger visibility and specialty-led growth.

Key upside/downside risks identified by Morgan Stanley include:

– Changes in US tariffs, MFN (Most Favoured Nation) pricing implementation, the Inflation Reduction Act (IRA), and evolving trade policies.

– Regulatory setbacks (e.g., FDA compliance issues).

– Forex volatility, which may impact margins and supply chains.