Pharma stocks back in vogue! Use this strategy to beat market volatility

Reasonable valuations along with expectations of potential upside made pharmaceutical stocks buzzing among investors on Dalal Street as well as mutual funds in June.

ICICI Prudential, country’s biggest mutual fund in terms of assets, has come up with a way to tap the opportunity with a sector-specific scheme -- ICICI Prudential Pharma Healthcare and Diagnostics (PHD) Fund. The new fund offer will open for subscription on June 25.

There are hopes that more institutional money will come into the pharma sector. Aditya Birla Sun Life has also applied with the markets regulator Sebi to launch a new scheme.

After underperforming benchmark equity index during the last three years, the Nifty Pharma index has jumped 12 per cent in June so far, whereas Nifty is up around 0.13 per cent.

Many market mavens are also bullish on pharma stocks.

V Srivatsa, fund manager, UTI Mutual Fund in a chat with ETNow said, “Pharma can be a surprise pack for the next year because we believe that the earnings have bottomed out.”

Dr Reddy’s Laboratories has rallied over 23 per cent this month, while Alembic Pharma, Lupin and Piramal Enterprises gained up to 20 per cent during the same period.

Largecap stocks, including Sun Pharmaceuticals, Aurobindo Pharma and Glenmark Pharma, have climbed between 10 per cent and 16 per cent this month. Cipla and Cadila Healthcare rallied 15 per cent each during the same period.

The Nifty Pharma index corrected more than 20 per cent over the past three years (after 30 per cent CAGR over FY11-15). Hit by regulatory clampdowns, channel consolidation in the US and increased competition had kept pharma stocks under pressure.

“Despite the all-too-visible business challenges, they persisted with higher R&D activity (related to complex generics and specialty business), which aggravated the pain,” said HDFC Securities in a report.

The brokerage firm believes that FY19 may see a gradual comeback for largecap pharma companies, driven by actual and likely regulatory resolutions, moderating price erosion and several product launches across generic and specialty categories in 2HFY19. “We believe earnings have bottomed out, while the base is favourable. We upgrade Sun Pharma to Buy,” said HDFC Securities.

March quarter result of pharma companies remained weak with continuing pricing pressure in the US generic business, the solace was the pickup in domestic business and emerging markets business, according to Sharekhan.

“Net profit of companies was dented on account of one-time tax adjustment related to changes in US tax rates and continued pricing pressure in the US business. Most pharma companies under our coverage universe are trading at 8-18x their FY2020E earnings. We advise selective buying and prefer companies such as Biocon, Cipla and Divi’s,” the brokerage house said in a report.

Sun Pharmaceutical Industries received positive news recently, with the US Food and Drug Administration (FDA) clearing its Halol plant, which had been under supply restrictions due to quality control failures.

The company will now be able to restart supplies to its largest market, the US, from this facility, which contributed around 15 per cent to the company's US revenue in 2015.

IDFC Securities maintains ‘Outperform’ rating on Sun Pharma with a target price of Rs 574. “Receipt of Halol EIR is major positive development for Sun’s US business. Sun Pharma is clearly the best placed amongst large domestic peers,” the brokerage house said.

Market expert Ajay Bagga told ETNow, “The beneficiaries of the stronger dollar will clearly be IT and pharma. IT is already moving. I think pharma has started a move again so that also one can look at. The only space in pharma to avoid is the leverage bets where there is too much leverage on the balance sheets. It will take some time to work out but otherwise, there are a lot of companies which are turning around. The US revenue forecast into the EPS is at historical lows and probably have bottomed out.”

Going by market experts, India has established itself as a global manufacturing and research hub in the pharmaceutical space. India contributes nearly 10 per cent of the world production volume and 50 per cent of its revenue comes from exports. The government’s initiative such as Pharma Vision 2020 to make India a global leader in manufacturing is one of the catalysts for the sector.

“India has the second largest number of USFDA-approved manufacturing plants outside the US with 2,633 FDA-Approved Drug Products,” said ICICI Prudential AMC.

Sanjiv Bhasin of India Infoline suggested that an investor should make an SIP in Dr Reddy, Sun Pharmaceutical, Lupin, Aurobindo, and Biocon. “Strides Shasun or a Cadila could be the second guard stocks to own but these five large caps should be the best bellwethers one they become a very good proxy against any weakness in the rupee,” Bhasin told ETNow.