Stocks of most pharmaceutical companies saw incredible gains due to the increased demand for medicines during the multiple COVID-19 waves over the past two years.
However, with countries relaxing lockdown norms and coming back to normalcy, the stock prices of pharma companies are starting to ‘correct’.
As of March 22 close, the Nifty Pharma index is down 5 percent this year so far while the benchmark Nifty is just 0.22 percent down this year. Besides, Nifty50 is 7 percent below its 52-week high of 18,604.45 while the Nifty Pharma index is 10 percent down from its 52-week high of 14,938.25.
What happened to the pharma stocks?
India witnessed the third wave of Covid-19 in January 2022, however, the third wave ended quickly owing to wider vaccination coverage and natural immunity also as a large section of the population had already been exposed to the virus during the first and second wave of the pandemic.
Experts point out as the fears of Covid-19 have ebbed, state-wise budgets have come down this year as temporary hospitals and other state government services related to Covid-19 are not required as of now. This may have a small impact on the pharma sector but not a significant one.
Brokerage firm BOBCAPS, which is a wholly-owned subsidiary of Bank of Baroda, in its March 21 report highlighted the fact that the Nifty Pharma index has declined 9 percent against a 21 percent drop in its one-year forward price-to-earnings ratio (P/E) valuation since hitting a peak in August 2021.
"The decline stretches across stocks and market capitalisations, barring a few exceptions such as Sun Pharma, Divi's Labs, Laurus Labs and Eris Lifesciences. We note that in August 2021, the Nifty Pharma index achieved its highest one-year forward P/E of 28.2 times since FY17, which was followed by its steepest decline to 14.7 times within five months," said BOBCAPS.
The sharp decline in the pharma index from its five-year peak began as India and the world started to emerge from the worst of the Covid-19 second wave. BOBCAPS said that investors’ perception of pharma stock value started to wane once lockdowns were eased. Further, assumptions that the worst of the pandemic was behind us after the second wave was proved correct by the milder Omicron impact.
Alongside the waning Covid threat perception, Indian pharma players reported sequential tepid earnings growth in Q2 and Q3 of FY22, while rationalisation of management guidance revealed the limitations of their extraordinary pandemic-led growth. The return of higher operating costs as A&P, travel and other spending revived post-pandemic also dented profitability. These factors have led to a reduction in investments and gradual profit booking in the pharma sector, BOBCAPS observed.
How to play pharma sector
As per Purvi Shah, DVP -Fundamental Research and Pharma Analyst, Kotak Securities, as Covid-19 ebbs, the strategy for the pharma sector will be to stay selective and invest in stocks with no or minimal USFDA regulatory issue.
"Stocks with backward integration and less dependence on China for key starting materials (KSMs) will perform well. Focus on stocks with a strong balance sheet and good management. Hospital stocks may perform well in near future as domestic patients inflow increases coupled with pick up from medical tourism," said Shah.
Akhilesh Jat, Pharma Analyst at CapitalVia Global Research underscored that Nifty Pharma saw some recovery from its eleven-month low ahead of the fresh surge in Covid cases around the world. Besides, buying interest increased in pharma companies after the guidelines released by the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, for the scheme Strengthening of Pharmaceutical Industry with a total financial outlay of ₹500 crore in the second week of March 2022.
In 2021 Pharma Industry recorded growth in double-digits led by growth of Covid-19-related products and we can expect over 10 percent growth in this year as well, said Jat.
"The pharma sector generated a trade surplus of nearly $18 billion in last financial year. There will be opportunities for companies to expand their Covid portfolio as new antivirals like Molnupiravir and vaccine booster doses will be in demand, however, currency fluctuations, interest rate uncertainty and a significant increase in raw material and transportation costs have been some of the major challenges," Jat said.
"If we look at Q3FY22, Covid-related revenue of the pharma companies has already come down significantly. Some of the sectors like hospitals and path labs will have some impact. Overall, we do not expect much impact of lower Covid cases on the pharma sector. We continue with our neutral call on the sector," said Yash Gupta- Equity Research Analyst, Angel One.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.