For almost a year, pharma stocks have been under pressure for various reasons, including US FDA alerts and waning worries over Covid.
In the last one year, the Nifty Pharma index is down 10% against a nearly 3% fall in the Nifty50. However, a sharp correction in pharma stocks seems to have attracted some buying. In September, Nifty Pharma rose 2% while the benchmark Nifty declined almost 4%.
It is early to say that pharma stocks are now on the cusp of a revival. However, they can do selectively well from here, analysts believe.
"After underperforming for the past one year, healthcare stocks can selectively do well from hereon. Generic price pressure may be coming to an end, domestic pharma sales are seeing a good uptick and new US FDA alerts are few and far between. The Rupee depreciation has provided a tailwind for export focussed companies," said Deepak Jasani, Head of Retail Research, HDFC Securities.
Concerns for the sector are slightly easing which will offer opportunities for investors in the sector.
Yogesh Kalwani Head of Investments InCred Wealth said that the recent interaction with a few pharma companies’ management suggested that the pricing environment in the US generics market has improved substantially. Various companies highlighted that product pricing has broadly stabilised and the worst phase seems to be over.
"The issue of a high Covid-related base was essentially a Q1FY23 phenomenon and is primarily behind us. Across companies, management gave guidance of normalized growth in the second half of FY23F. The heightened cost pressure of the last two quarters has not worsened further but no major respite has come either. Still, there is unlikely to be any incremental margin pressure in the near term," said Kalwani.
"We feel pharma could be a good contra bet from hereon with pricing stability in the US and domestic business also stabilising after a strong base during Covid," Kalwani said.
The Q2 expectations
The September quarter results of the pharma sector are expected to show improvement due to the rupee's weakness, lower Covid base and strength across branded markets.
"We expect a boost for pharma companies in Q2FY23 from underlying strength across branded markets, lower Covid base and INR depreciation. Offsetting the above factors would be continued US generic price erosion, EU/EM currency depreciation, RM inflation and higher freight costs (albeit lower QoQ)," said Kotak Institutional Equities.
"Ex-Covid, we expect average domestic growth for the sector to be over 10% year-on-year (YoY) in Q2FY23. Overall, we expect 10% YoY sales growth in Q2FY23 for our pharma coverage. On the operating front though, we expect 2% YoY growth in EBITDA for our pharma coverage due to input cost pressures," said Kotak.
Brokerage firm Nirmal Bang expects the domestic formulations business under its coverage universe to grow in the high single digits mainly due to continuous growth in the Chronic segment and seasonal tailwinds.
"US business growth is expected to be driven by currency tailwinds and new launches; however, acute price pressures in the US business will continue to drag overall growth," said the brokerage firm.
"Margins are expected to remain under pressure due to continuous steep price erosion in the US market and cost inflation, although it is expected to improve sequentially," said the brokerage.
Disclaimer: The views and recommendations given in this article are those of individual analysts and broking firms. These do not represent the views of MintGenie.