A fresh wave of COVID-19 cases in parts of India and Southeast Asia has reignited investor interest in the healthcare sector, particularly diagnostics and hospitals. But for pharmaceutical stocks, the picture is more nuanced. The Nifty Pharma index is down nearly 12 percent from its 2024 peak, underperforming the broader market and signalling a sector-wide consolidation.
“COVID may help diagnostics and hospitals more than pharma. For pharma, the impact will be selective—a few APIs (active pharmaceutical ingredients) like paracetamol could benefit,” said Vishal Manchanda, senior vice president, institutional research at Systematix Group. “Generics may not see much of a favourable impact. There’s no listed company in the vaccine space, and prior efforts by players like Dr Reddy’s didn’t materialise,” Manchanda’s said.
Despite the subdued price action, analysts caution against misinterpreting this as a breakdown. Instead, pharma stocks appear to be recalibrating. “Stocks are in a consolidation phase—if you look at the charts, most names are range-bound. The growth ahead is not predictable; it's binary and event-driven,” said Manchanda, noting that the sector’s earnings visibility remains clouded.
Indeed, hopes of a strong revival in the base business are diminishing. “Opportunities that were expected to replace one-offs haven't materialised, and the base business itself hasn't grown fast enough,” he added.
For FY26, the broader outlook remains tepid. “I do not see many triggers out there for pharma to kind of outperform expectations. Certain companies will do well, but the overall outlook remains muted,” Manchanda said.
Large-cap names like Sun Pharma, Cipla and Dr Reddy’s are grappling with margin pressures due to US pricing erosion and the fading tailwind of COVID-era blockbusters. Sun Pharma, for instance, is down about 14 percent from its year’s high. Analysts point to flat to low-single-digit revenue growth, limited R&D intensity and high regulatory dependence as core reasons for the drag.
“The single-digit growth expectation in FY26 was largely known. The earnings season just solidified that sentiment—it had a nullified effect on stock performance,” Manchanda observed.
Regulatory catalysts will likely define the near-term trajectory. Several firms are awaiting key approvals from the US Food and Drug Administration, which could swing FY26 earnings either way. “The USFDA-related triggers can lead to sharp moves—but they’re binary. If approvals come through, stocks could move up but of course, only time will tell,” Manchanda said while explaining the dynamics behind potential triggers. He cautioned that execution and regulatory risk remain elevated: “Whatever stocks move from here, it’ll be based on whether key triggers materialise and how well companies execute.”
In this context, select midcaps are emerging as relative outperformers. Ajanta Pharma and Glenmark Pharma, for instance, delivered strong double-digit growth in Q4FY25 and outperformed in the market. Ajanta is up 13 percent year-to-date, while Glenmark has about flat returns post-earnings. The outperformance reflects a potential sectoral shift toward midcap names with stronger margin profiles and clearer growth visibility.
At the same time, stock-specific triggers could drive selective upsides. Analysts suggest that Divi's Labs could do extremely well this year, primarily because of the US business. Its recent product launch could potentially account for 20 to 25 percent of its profit growth. Similarly, in Cipla’s case, if certain USFDA approvals that are expected pan out, the stock could rally significantly from current levels, they said.
Tariff-related uncertainties, particularly with respect to US imports, although an over-discussed topic now, is still an overhang. “Tariffs are more of a negative trigger—if they come, it’s a headwind. If they don’t, things will continue as they are. But right now, markets have mostly absorbed this risk,” Manchanda noted.
Independent pharma analyst Vineet Gala also warned that most Indian pharma exporters lack pricing power. “Any tariff will directly hit margins,” he said, underscoring the structural fragility in large-cap valuations.
On the other hand, niche contract manufacturing plays are gaining traction. CDMO or contract development and manufacturing organisations like Divi’s Labs and Piramal Pharma are seeing renewed interest due to order book visibility and EBITDA margin expansion. But Gala cautioned that investors need to be selective. “Not all CDMOs are created equal—some lack pricing power and innovation, and rely on a handful of clients, suggesting a differentiated valuation approach is warranted,” he said.
Meanwhile, the anti-obesity drug wave—especially around GLP-1 analogues—remains a long-term story, though early positioning by Indian companies is likely to intensify as clinical trial data and partnerships begin to roll in.
From FY22’s peak forward P/Es of 30–35x, most pharma stocks now trade between 20 and 30x forward earnings, with a few outliers still commanding premiums above 40x. The sector is relatively attractive versus overheated pockets of the market, said Sumeet Baghadia, Executive Director at Choice Broking. “Pharma's defensive nature and emerging growth stories may appeal to selective investors,” he added.
Technically, the Nifty Pharma index remains in a constructive pattern, with key support between 19,000 and 19,500 points and resistance at 22,000. A breakout from this range could signal a return of institutional interest.
Manchanda added to the outlook saying that large names still have key US launches pending, and there’s some potential upside from inventory normalisation—but it’s not a broad-based rally.
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