Pharma stocks have been witnessing healthy traction since March.
The Nifty Pharma index is up over 6 percent since March this year against a two percent gain in the Nifty50 index.
Some of the pharma stocks, such as Aurobindo Pharma (up 25 percent), Glenmark Pharmaceuticals (up 19 percent), Divi's Laboratories (up 13 percent), Dr. Reddy’s Laboratories (up 12 percent), Abbott India (up 12 percent) and Zydus Lifesciences (up 10 percent) have risen in double digits since March.
Why are they rising?
Pharma companies are witnessing several tailwinds, including moderation in raw material prices, price increases and rising Covid cases, which are giving a boost to their stocks.
"The recent rise in the pharma stocks can be attributed to a number of factors, such as an increase in Covid-19 cases in India, a price increase of up to 12 percent for essential medicines beginning April 1 as approved by the NPPA (National Pharmaceutical Pricing Authority), and a moderation in raw material prices due to an improvement in supply from China," Yadhu Ramachandran, a research analyst at Geojit Financial Services observed.
The rise in pharma stocks can also be attributed to the current market sentiment which looks to be in favour of defensive stocks. Since pharma is a defensive sector which can endure the pain of an economic downtrend, investors find them attractive at this juncture.
"Investors are seeking defensive stocks that are relatively immune to economic downturns, and pharma stocks are often seen as defensive due to the essential nature of healthcare products and services," said Shrey Jain, Founder and CEO of SAS Online.
"Another reason behind the rise in pharma stocks is based on speculation of higher revenue and business coming in for the pharmaceutical companies in case Covid-19 cases continue to rise in near future," said Jain.
Analysts and brokerage firms are expecting decent March quarter numbers from pharma companies.
As MintGenie reported earlier, global brokerage firm Nomura is overall bullish on the fourth-quarter (Q4FY23) earnings of pharma companies under its coverage as it believes price stability in the US and a reduction in cost pressure are likely to support the sector.
Nomura expects the revenue growth of companies under its coverage to be in the range of 3 percent and 13 percent quarter-on-quarter (QoQ) and year-on-year (YoY) respectively.
According to its estimation, the growth of earnings before interest, taxes, depreciation, and amortisation (EBITDA) is at -7 percent and 36 percent QoQ and YoY, respectively, while the change in adjusted net earnings is expected to be -15 percent QoQ and 37 percent YoY.
The road ahead
Ramachandran believes companies with strong domestic exposure are likely to perform well while export-oriented pharma companies have a modest outlook as the price pressure on US generics is expected to continue in FY24.
However, Ramachandran underscored that the moderation in raw material costs and valuation will help to attain steady performance even in a volatile market.
Jain pointed out that the future trajectory of the pandemic is highly uncertain, and pharma stock prices can be influenced and can be subject to volatility and fluctuations in the short term.
Anil Rego, the founder and fund manager at Right Horizons PMS underscored that the India pharma market grew 19 percent YoY in March 2023 compared to 6.7 percent in February 2023, driven by seasonality and low base effect.
Rego expects domestic growth to be partially impacted in Q4FY23 as the numbers will reflect the revision in ceiling prices under NLEM (National List of Essential Medicines).
Moreover, he also expects companies to grow at high-single to low-double-digit YoY in the Indian market as cost pressures are gradually easing, but they are likely to remain at elevated levels.
"In the pharma space, we have a neutral view on the generic space, are bullish on the CDMO (Contract Development and Manufacturing Organisation) space and expect double-digit growth from FY24 onwards, owing to strong order book position and capacity addition," said Rego.
Along with pharma, the outlook for hospital stocks has also improved.
Rego expects double-digit growth in the hospital space and he believes some players in this space may maintain their margin expansion trajectory as new hospitals and new bed additions continue to increase overall profitability as occupancy ramps up and ARPOB (average revenue per occupied bed) increases.
"We recommend investing in the business with a solid order book in the CDMO space and hospitals capable of sustaining growth as the number of beds increases," said Rego.
Disclaimer: The views and recommendations given in this article are those of individual experts and broking firms. These do not represent the views of MintGenie.
