Analysts Moneycontrol spoke to seem to be confused if the pharmaceuticals sector is emerging as a defensive sector. While one thinks that companies in the generics and CRAMS business may do well, the other thinks that CRAMS focused companies will do better than the generics ones. Risk-reward ratio in front line companies is not in investors’ favour.

“Sector per se I don’t think that pharma is a defensive sector. Specific stocks can outperform the broader markets, though,” says Sarabjit Kour Nangra of Angel Stock Broking.

If almost USD 20 billion dollar companies are coming off patent in FY 2007 and Indian front line pharma companies are likely to benefit from them, Nangra feels that the news is already discounted in the current valuations of these companies and they may not outperform the broader markets.

“Risk-reward ratio in front line pharma companies is not in favour of investors,” she adds adding conviction to her belief that generics-based companies are not likely to do too well on the stock markets.

CRAMS focused companies like Nicholas Piramal and Cadila Healthcare, however, will be doing well and investors can buy companies in this business. “If one were to be invested in front line India pharma goliaths then they must have at least 3-4 year investment horizon for getting significant returns,” counters she.

Surya Narayan Patra, of Networth Stock Broking has a different take on who will lead the sector.

For him, the recent spate of M&A activities by Dr Reddy’s and Ranbaxy can take them into higher orbit and these companies will benefit the most out of the generics business worth USD 20 billion going off patent this year.

Other CRAMS focused entities like Shasun Chemicals and Jubilant Organosys will also provide good returns, says Surya Narayan.

He would advise investors to bet on Dr Reddy’s and Ranbaxy and expects minimum 50-60% returns from these two stocks within a two-year time frame. CRAMS focused companies like Cadila Healthcare and Nicholas Piramal can pay rich dividends with a minimum 70-80% returns within the same time period.

Companies in the contract manufacturing and services space can outperform the markets more than those in the generics segment.

“The latter have run up significantly on the bourses over the last 4-5 months on the back of material news flows be it M&A, court rulings and that’s why most of these companies have posted better than expected Q4 numbers,” Nangra says explaining the rapid rise in the stock prices of some top line Indian pharma companies. 

“These are the things that are moving liquidity towards these companies.”

By Prasanna Zore