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Pharma sector's stellar show in CY20 likely to extend further, say experts

The sector emerged brighter amid the gloom of the COVID-19 pandemic. The Nifty Pharma index is up nearly 40 percent in the calendar year 2020 (CY20) to date, against a 4 percent rise in Nifty.

November 11, 2020 / 11:30 AM IST

The pharma sector remained among the few sectors that continued its upward march during the times of coronavirus pandemic when most sectors were witnessing capital outflow.

The sector emerged brighter amid the gloom of the COVID-19 pandemic. The Nifty Pharma index is up nearly 40 percent in the calendar year 2020 (CY20) to date, against a 4 percent rise in Nifty.

After a five-year of underperformance, the pharma sector is back in action given the widespread COVID-19 pandemic.

The sector, along with IT and telecom, played a vital role in the market recovery.

Experts point out that the market recovery, after a sharp fall in March 2020, was mostly driven by stocks or sectors which were least impacted by the pandemic and had better earnings visibility compared to others.

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Sectors like IT, pharma, telecom, consumer staples, agro chem and specialty chemicals witnessed sharp up-move and supported the market rally.

Experts are of the view that the sector will continue to do well as it still has some steam left.

Aishvarya Dadheech, Fund Manager, Ambit Asset Management is of the view that the pharma sector will continue to see traction as the US business is bound to see some stabilisation and even India business is showing some traction.

"There is still a lot of juice left in the pharma sector for the next one to two-year perspective," Dadheech said.

"Pharma, along with IT, auto and financials should continue to drive markets," said Binod Modi, Head Strategy at Reliance Securities.

Jyoti Roy - DVP- Equity Strategist, Angel Broking thinks the pharma space will continue doing well given strong growth dynamics and revenue visibility.

Pharma stocks have been buzzing of late after their impressive September quarter earnings. Besides, drugmaker Pfizer's claim that its coronavirus vaccine was more than 90 percent effective in preventing infection also boosted sentiment.

A report from CGS-CIMB Securities on November 5 highlighted that the Indian pharmaceutical market sales were impacted by the COVID-19 lockdown in April-May 2020 but have rebounded since June 2020.

"We believe after Unlock 5.0, a gradual rise in prescription demand and recovery in elective surgeries in hospitals in the second half of FY21 should result in gradual traction in overall value growth," CGS-CIMB said.

It has initiated coverage on the sector with an 'overweight' rating, given the improving US outlook and the belief that negative operating leverage, which compressed return ratios in the past, should improve.

"USFDA compliance issues at manufacturing facilities are being resolved more quickly by pharma companies given increasing oral drug shortages. Also, a recovery in domestic pharma market revenue growth could generate better cashflows and healthy ROCE and lead to a sector re-rating, in our view," CGS-CIMB Securities said.

The brokerage firm said that the sector valuation P/E retraced to 27.5 times [+1SD] in November 2020 from its low of 16.1 times in April 2020 due to a recovery in India's pharma industry and improved US outlook.

"As the sector is emerging from the bottom of its earnings cycle, the P/E will appear higher. As P/E is coming off a trough, earnings (net profit) and cashflows will be strong, especially with capacities largely in place," CGS-CIMB said.

The Indian pharma industry has steadily evolved over the years and now boasts of the largest number of FDA approved pharmaceuticals units located outside the US.

Brokerage firm IIFL Securities pointed out after hitting a lean patch over 2015-2019, the sector is well-poised to continue the current outperformance against the broader index on account of structural changes.

"We believe that this is an opportune time to ride the latest Pharma wave while also securing the cushioning of defensive nature of the sector in midst of unreasonably high valuations for the broader market. COVID-19 is a catalyst for sector considering the enhanced attractiveness of Indian Pharma," IIFL Securities said.

Higher generics prices in the US and rupee depreciation are positives for the pharma sector. On the flip side, adverse currency movement and supply chain disruption due to COVID-19 are the risks for the sector.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: Nov 11, 2020 11:30 am

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