Pharma stock gain on Q3 earnings outlook and defensive play

• Nifty Pharma went up by 6.4% in one month, with Biocon, Torrent, Zydus Life, Lupin and Glaxosmithkline offering double digit returns.
• New Covid variant, positive Q3 earnings outlook are driving the stock prices, say analysts.
• Improving US generics pricing as well as stable domestic growth is aiding the price rise.
  

In a volatile stock market, few sectors offer as much comfort as pharmaceuticals. The defensive sector known to be stable irrespective of economic conditions, has seen very good buying in the last few sessions. Going forward, its earning potential and robust growth seen in the market will offer comfort for brokerages bullish on the sector.

In the last one month, Nifty Pharma went up by 6.4%, with Biocon, Torrent Pharma, Zydus Life, Lupin and Glaxosmithkline offering double digit returns. Analysts hold a positive outlook for the sector due to many reasons, least of which is the recent spike in cases relating to a new variant of Covid-19.

“Beyond the new variant, India is a pharmacy to the world and the companies are investing in R&D to launch new products. We also remain optimistic on pharmacos in terms of performance, not just for this financial year but for the next financial year,” Gaurang Shah, senior VP at Geojit Financial Services told Business Insider India.

Source: NSE

A positive earnings outlook

In FY24, the sector has seen new earnings drivers after speciality generic exports gathered pace — offering revenue bounty to Indian exporters. Most analysts expect US launches to keep providing companies with revenue visibility. The price erosion that’s seen in the US market has also started to taper off.

“Indian pharma Industry is set to gain from the continuing benefits from specialty products like gRevlimid and Spiriva as well as easing price pressure in the US generics market, softening input/freight/energy cost and INR depreciation amid the moderating domestic formulations,” said a report by Phillip Capital.

Even as the double-digit in the branded formulations business seen in the last years has tapered down, the outlook of domestic formulations business is also promising, say analysts.

“The domestic India Pharma Market (IPM) continues to clock secular 9-10% growth, led by price hikes of 5-6%, volume growth of 2% and new introductions of 2-3%,” says a report by IIFL Securities.

Within the pharma sphere, most analysts are picking midcap pharma companies like Mankind Pharma, JB Pharma, Alkem and Ajanta. Not only have they been outperforming the IPM growth numbers, they are chasing growth.

“Most of the mid cap pharma companies, deriving 70-90% of their overall EBITDA from branded generic markets of India and rest of the world (RoW), continue to outperform domestic pharma market growth by 300-400 basis points per annum, thereby driving an improvement in their business mix, profitability levels and return metrics,” said IIFL.