Amid rising Omicron fears, will market momentum shift to pharma yet again?

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Bears are biting deeper into the global markets with the central banks tightening their monetary policies and the Omicron virus running riots. And investors, saddled with bleeding coffers, are looking back to pharma stocks yet again.

Although the Omicron COVID cases are rising rapidly, there is limited data till date on the clinical severity of this variant. The equity market has started reacting to the Omicron sweep as it did at the start of the previous waves. The strong bull phase seen over the past more than 18 months now seems to have been taken over by the bears.

Both the benchmark indices are trading 10 percent down from their 52-week highs. The NSE Nifty is 11 percent down, while the BSE Sensex has lost 10 percent off its 52-week high. During the past one month, both the indices have lost nearly 5 percent and in the past one week, the decline has been around 4 percent.

In this whole process, investors’ wealth has been eroded heavily and they are now reverting to defensive sectors like pharma, which had sustained good returns during the previous COVID waves.

During the first COVID wave in India, which was predominantly during the first half of the previous financial year, as many as 30 pharma stocks, excluding hospital stocks from BSE Pharma, had generated more than 100 percent returns and 52 stocks had appreciated by more than 50 percent. During the second wave – it covered the first half of the current fiscal –five companies appreciated by more than 100 percent and 21 scaled over 50 percent.

India is now known as the “pharmacy of the world” with high-quality medicines at a cheaper rate. With expanding healthcare market in India and rising global demand, the Indian pharma sector seems to be on the right path of growth.

Can pharma repeat its past performance once again as Omicron stokes the fear of a looming third wave of pandemic? Experts are cautiously optimistic.

“The pharma sector is showing signs of momentum, but I would not say that this momentum is only because of Omicron fears, as the trend started a bit before that,” said Sonam Srivastava, Founder of Wright Research.

In the recent market correction over the last month, pharma has also seen a sell-off, despite being an out-performer. “As per our sector rotation analysis, pharma has gained momentum as well as relative strength and could soon come into the leading quadrant. If the Omicron variant starts the third wave, we might see pharma taking the lead like it did in the previous two COVID waves,” Srivastava said.

The momentum in R&D spending remains robust on innovative drugs through synthetic/biopharma route driving business prospects for CRAMS (contract research and manufacturing services) companies. “In many cases, COVID has further boosted opportunities for CRAMS companies and the domestic formulation market growth trajectory sees an uptrend,” said Tushar Manudhane, Pharma and Heathcare Analyst at Institutional Equities, Motilal Oswal Financial Services.

The healthcare sector valuation remains in comfortable zone almost close to its three-year average PE multiple and rupee depreciation can be an add-on factor to improve the earnings outlook over the near to medium term, he added.

This bodes well for the sector from the business outlook and valuation perspective, independent of Omicron fears.

“There is no indication that momentum has built in as on December 17 and even on December 20, the sector as a whole has remained a laggard, with stock-specific outperformance of the likes of CIPLA,” said Pushkaraj Kanitkar, VP-Equities, GEPL Capital.

The sector has underperformed the benchmark by a wide margin even in the up move of last 2-3 months, he added. Therefore, it will be prudent to wait for prices to give a positive divergence before coming to the conclusion that momentum is setting in.

“In times like this, defensives like pharma stocks, could come back in favour and could also fall less than the others,” said Deepak Jasani, Head of Retail Research, HDFC Securities.

But it may not be a holistic surge for the sector because there might be a clear distinction between stocks that could benefit out of Omicron variant spread due to their drugs portfolio and others who may get hit as other treatments could be postponed.

“We don’t expect much firework in the pharma sector once again amid COVID-19 fears,” said Mohit Nigam, Head - PMS, Hem Securities.

The sector is currently going through multiple headwinds due to disrupted logistic and rising input prices. “We might see more margin pressure in next quarterly results too. Further, any lockdown condition could impact hospital procedures and hence drug sale,” he said.