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Pharma sector under the weather, analysts share their stock picks

In 2021, the Nifty Pharma index has clocked a gain of just 7 percent, while the benchmark Nifty has jumped 19 percent

August 26, 2021 / 02:01 PM IST
Advik Laboratories | The company has cleared its entire outstanding loan with Indian Overseas Bank (IOB) pursuant to one time settlement agreement entered into by company with IOB.

Advik Laboratories | The company has cleared its entire outstanding loan with Indian Overseas Bank (IOB) pursuant to one time settlement agreement entered into by company with IOB.


Indian market benchmarks are at record highs as concerns over COVID-19 ease and economic indicators show steady trends of growth. Sectors such as metal, IT, PSU bank and realty are leading from the front but the pharma sector is lagging behind.

The sector that hogged the limelight in 2020 seems to have lost steam. In 2021, the Nifty Pharma index has risen just 7 percent, while the benchmark Nifty has jumped 19 percent.

A tepid Q1

Even though the Q1FY22 numbers of the pharma sector were largely in line with expectations, they failed to cheer the market as there was some growth, margin-related pressure.

"Expectations were high in terms of earning but most of the earnings were in line or missed the estimates. The major problem for most of the pharma companies was commentary from the management about concern over pricing pressure in their US business," said Santosh Meena, Head of Research, Swastika Investmart.

Close

The low base of Q1FY21 and a sharp increase in demand for COVID-care drugs during the second wave helped domestic business. However, delays in new product approvals and increased competition due to the entry of new players to ease the availability of drugs put some companies under severe pricing pressure in the US market, say experts.

Many companies also experienced a sharp increase in logistic costs due to lower container and shipment availability and also higher air freights, which exerted pressure on the margins, they said.

Will the road ahead be better?

Analysts say the sector may see some pressure in the next one or two quarters due to the COVID-19 situation globally.

"We feel if the third wave intensifies, it can lead to an increase in logistic and raw material costs. Also, it can delay/defer order pick up and delivery, thereby impacting the profitability of companies," said Purvi Shah, Deputy Vice President-Fundamental Research of Kotak Securities.

A broader market correction along with profit-booking in the sector can lead to a drop in pharma stocks, which should be seen as an entry opportunity for the long term (holding period of more than 18 months

at least), Shah said.

The FY23–24 numbers will be much better as business returns to normalcy, she said.

"Only dampener or unpredictable risk that can affect the long-term pharma story is that whenever USFDA resumes inspections of plants and if compliance is not met, it could result in a list of companies getting either Form483’s or warning letters and in the worst case, import alert ban leading to earnings downgrade," Shah said.

Brokerage firm Anand Rathi Share and Stock Brokers expect the most growth- and margin-related challenges to persist in Q2FY22.

"We expect sales of the companies we cover to grow 12.3 percent/13.3 percent in FY22/FY23, driven by growth rebounding in the domestic market and launches in the US, while EBITDA and PAT may grow 6.7 percent/20.3 percent and 4 percent/23 percent in FY22/FY23," said Anand Rathi.

Likhita Chepa, Senior Research Analyst, CapitalVia Global Research, said increased awareness among people about health may lead to more spending for healthcare that can benefit the sector.

"Apart from the core pharma and the healthcare service providers, there are also tailwinds in the API segment driven by the 'China plus one' as well as the focus of the Indian government on local manufacturing. This can provide a multi-year growth opportunity for the segment," said Chepa.

What to buy?

Shah prefers stocks like Cipla and Sun Pharma, which have balanced portfolios to weather challenging situations.

Though Lupin is available at favourable multiple, Shah said it has high risk-reward, as the company has five manufacturing facilities under USFDA scanner. Thus any positive or negative news flow on the plant status can swing the stock price either way.

Meena believes API-related stocks like Divi's Labs, Laurus Lab, Granules, and Solara may continue their outperformance.

"Sun Pharma may also do well, while Auro Pharma and Lupin may underperform due to their inherent weakness. Investors are advised to remain selective in this space," said Meena.

Chepa has a “buy” call on Sun Pharma and Lupin.

Brokerage firm Anand Rathi is positive on Torrent Pharma (strong chronic portfolio, productivity improvement and rebound in the US to boost margins), Ajanta Pharma (rebound in India sales to improve earnings quality) and CRAMS companies such as Suven Pharma (commercialisation of new molecules and forward integration to aid growth).

Brokerage firm JM Financial Institutional Securities said it continues to prefer Sun Pharma, given a strong earnings momentum, with Alembic, Strides and Jubilant Pharmova offering a favourable risk-reward after the

recent correction.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Aug 26, 2021 02:01 pm
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