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Is your portfolio anaemic? Careful, the pharma pill may not help defend against vulnerability

Brokerages turned cautious on the sector just ahead of September quarter earnings.

Updated: Oct 24, 2018, 12.31 PM IST
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Stocks like Merck, Valiant Organics, Albert David and Kilitch Drugs have rallied between 60 per cent and 125 per cent so far this year.
How is the health of your portfolio after the recent selloff in the equity market?

If you are planning to create safeguards for your portfolio by adding some defensive stocks, then you got to be very discerning; more so if it is pharma.

For, there has been strong polarisation among pharma stocks, which leaves the entire basket a complex mix of good and bad apples.

With a 0.71 per cent year-to-date (YTD) gain, the Nifty Pharma index has outpaced the benchmark NSE Nifty index, which has risen 0.17 per cent in this period.

Stocks like Merck, Valiant Organics, Albert David and Kilitch Drugs have rallied between 60 per cent and 125 per cent so far this year.

Some of the well-known names such as Sun Pharmaceutical, Ipca Labs, Aurobindo Pharma, GlaxoSmithKline Pharma, Biocon, Divi’s Labs, Pfizer, Abbott India have gained between 3 per cent and 31 per cent on a year-to-date basis.

At the same time stocks like Orchid Pharma, Mangalam Drugs, Avon Lifesciences, Morepen Laboratories, Indoco Remedies, Ajanta Pharma, Laurus Labs and Cadila Healthcare are down between 12 per cent and 70 per cent.

Brokerages turned cautious on the sector just ahead of September quarter earnings. They expect some of the pharma firms to report weak operating performance in Q2 on account of sustained pricing pressure in US market, a high base of the US generics business, muted domestic business growth on account of high base led by GST-led channel refilling and increased raw material cost due to supply disruption from China.

Even after the rally in last few months, some of the pharma stocks are trading close to their long-term average multiples due to de-rating in last two years, brokerage Sharekhan said in a report.

“Though the risk of earnings downgrade still persists, given the near-term challenges, we see an opportunity to invest in quality names,” it said.

IDBI Capital Markets has a cautious view on the sector and advises selective stocks picking. “During Q2 of FY18, post GST implementation, all companies re-filled the channels via inventory push. That remains an overhang. But given the volatility in the US market, we prefer domestic-focused players,” it said.

The brokerage said margins of pharma companies are likely to be under pressure as most of them import active pharmaceutical ingredients (APIs) and intermediates from China, where prices have increased substantially due to supply constraints.

Post GST implementation, Indian pharma companies reported large sales growth in Q2FY18, that high base will drag growth this quarter for India formulation businesses.

“With the disadvantage of a higher base in sales in Q2FY18, we expect average domestic sales growth (YoY) to be around 8-12 per cent in Q2. We expect domestic formulations market to continue to be challenging, especially for companies that are highly dependent on acute therapy drugs. It would be more challenging for large Indian pharma companies due to a large base and strong restrictions on churning out new combination drugs,” said Prabhudas Lilladher, a Mumbai brokerage.

“With a few major launches in the US, depreciating currencies across emerging markets, including rupee, we expect moderate growth in exports. Most emerging market currencies had a weak performance against the US dollar. USD appreciated 4.7 per cent QoQ in Q2FY19 and we expect gain from an appreciated dollar to be passed on to adjust price erosion in US generics over time,” the brokerage said.

For investors looking to add pharma names to their portfolios, IDBI Capital Markets recommends Cipla and Dishman Carbogen Amcis, on which it has buy ratings with price targets of Rs 483 and Rs 321. However, it has ‘reduce’ rating on Merck India and Sanofi India.

Prabhudas Lilladher has ‘buy’ ratings on Aurobindo Pharma, Eris Lifesciences and Ipca Labs with price targets of Rs 909, Rs 849 and Rs 642, respectively, while Sharekhan prefers Biocon, Divis and Sun Pharma.

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