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The laggard has now become the outperformer as many stocks in the pharmaceutical sector have posted double-digit gains from their lows at a time when benchmark indices have remained more or less flat.
Commenting on the same, Dipen Sheth, Head-Institutional Research, HDFC Securities, said there is certainly some kind of bottom forming happening in the pharma space. “Over the last 3-4 months, regulatory headwinds have come down. We saw a price erosion, the rupee has fallen versus the dollar and many large pharma companies despite headwinds have not stopped pumping money into research and development.”
He said the brokerage has upgraded its rating on Sun Pharmaceutical Industries given the products in its specialty product pipeline
Sheth is positive on Voltas and Symphony, which have corrected 20-30 percent from their respective peaks. “Symphony manufactures air coolers and has a market penetration of about 10 percent. For Voltas, which manufactures air conditioners, the market penetration is close to 4 percent. If we look at the space in which both companies operate – Voltas operate in an organised market while Symphony which manufactures air coolers still faces some unorganised players – there is a huge addressable opportunity as tax compliance (GST) kicks in. The reason why we are bullish is because of the structural story of penetrations which is likely to play out for many years.”
He likes ITC as it is trading at 22-23 times FY20e price-to-earnings. “It is the cheapest stock in the sector where the median valuation is close to 40 times. The company has the largest market capitalisation. The reason why it has not performed in the recent past despite the big run-up in consumer stocks is due to relentless adversity on taxation. Despite that, ITC has managed to grow earnings over the last two years, which gives us an idea about the pricing power of the company.”
He also bullish on its FMCG business. “They have built an about Rs 10,000 crore FMCG business. At Rs 10,000 crore, the business is large enough for us to expect that margins will change. The hotels part of the business is ripe for a cyclical uptick. After two years of continuous bashing on the tax adversity front, ITC is well placed now to get back into the volume game,” he explained.
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