Market veteran Madhu Kela sees the recent upmove in the pharmaceutical sector as more than just a short covering rally.
Market veteran Madhu Kela sees the recent upmove in the pharmaceutical sector as more than just a short covering rally. “It looks like the valuation froth in the sector has corrected, which is a positive sign. We have seen large wealth destruction in the pharma space from 2008 when the market capitalisation stood at Rs 1 lakh crore, which went to Rs 10 lakh crore and then halved. To the best of my knowledge none of these companies have ever declared a loss, including companies like Wockhardt,” he said in an interview to CNBC-TV18.
Despite the recent market volatility, he said that most pharma companies have invested almost 13-14 percent of their sales on research and development. “Two big issues weighed on the pharma sector: a) Issues raised by the US Food and Drug Administration on many largecap as well as midcap companies, b) A lot of froth in the market given the rich valuations.”
Now, Kela sees the overhang from both these issues almost over. “USFDA issues for many firms will be resolved in the next 4-6 months. In terms of valuations, some of the companies are available at 1.5-1.3 times book value.”
So, should investors hunting for value in the pharma space? He sees plenty of opportunities but advises one to remain selective. “Investors looking to construct a portfolio with a 2-3 year time period should select one large company, one or two midcaps and one company which is off investor’s radar to generate the best possible returns.”