The Nifty Pharma index scaled a new all-time high, trading in the green in 14 out of 17 sessions backed by strong earnings for the September quarter. Since October 26 till date, the index has risen nearly 9 percent while the benchmark Sensex and Nifty gained 4.5 percent each.
In the last one month, Alkem Laboratories surged 23 percent, Aurobindo Pharma 18 percent, Ipca Labs 15 percent, Zydus Life and Torrent Pharma 11 percent each, while Gland Pharma, Granules India, Glaxo Pharma, Divi's Lab, Sun Pharma, Cipla, Sanofi jumped 5-9 percent.
Rajesh Palviya of Axis Securities said the pharma sector turned around with strong results during the quarter. High-beta stocks excelled riding on the momentum in the market, leading to a theme of sectoral rotation. When banking stocks took a beating after the Reserve Bank's risk weight adjustments last week, IT and pharma supported the market rally, he said.
Palviya added that over the past few months, the IT and pharma have been consolidating. With light positioning in market derivatives, savvy players took advantage by creating positions in this sector. The momentum is expected to persist as several stocks are breaking out. Overall, the sector is gaining traction, especially in pharma, which has drawn significant attention due to its lack of returns since the rally began, it said.
In the second quarter of FY24, the pharma stocks saw strong revenue growth of 14.3 percent over the last year and 1.7 percent over the previous quarter. This was due to increased sales volume, new product launches like gRevlimid, gSpiriva, gPrezista, and more stable pricing in the US market. Profit margins also improved by 210 basis points year-over-year and 50 basis points quarter-over-quarter, benefiting from reduced cost inflation and steadier prices.
The US market experienced robust sales on new products and heightened demand for reliable suppliers amid drug shortages. Price erosion in the US is stabilising, partly due to ongoing drug shortages, analysts said.
Gaurav Dua, senior vice-president and head of capital market strategy at Sharekhan by BNP Paribas, pointed out reasons behind the surge in the Nifty pharma index surge. He attributes this to improved performance of branded generic exporters in regulated markets, notably the US, boosting stocks like Sun Pharma, Dr Reddy's Lab, Lupin, and Zydus. During market volatility, the defensive nature of the healthcare sector tends to draw buying interest. Additionally, certain pharma stocks offer more favourable valuations, enhancing their attractiveness at this level, Dua said.
Axis Securities in a recent note said it expects high single-digit domestic growth in FY24. Robust growth in the US market will continue due to normalised prices in the base business and ongoing success of products like gRevlimid, gSpiriva, and gPrezista. In the US, supply constraints have reduced price erosion significantly, expected to stay low for the rest of FY24.
India's growth is propelled by price hikes and strong performance in chronic therapies, with major companies forecasting high single-digit growth for FY24. Margin improvement anticipated through normalised raw material and freight costs, easing US price erosion, and achieving a better product mix. Yet, concerns persist over the US FDA inspections and the potential increase in price erosion once supplies stabilise, Axis Securities added.
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