US growth pill puts pharma stocks in higher orbit

Attractive valuations, weaker rupee add to the Street's bullish view

Led by front-line pharma stocks, the S&P BSE Healthcare Index gained 2.63 per cent on Wednesday when Sensex closed 0.36 per cent up. Sun Pharma, Aurobindo, Glenmark and Lupin surged about 2.8-4.5 per cent, while Cipla and Dr Reddy's gained more than one per cent. Sun Pharma Advanced Research (SPARC) was the biggest gainer ending the day at Rs 432.95 up 8.24 per cent, while Sun Pharma too gained 4.32 per cent to Rs 927.25.

Key pharma stocks, which were correcting over the last few months, are now being the most sought after. One of the reasons for optimism has been the robust performance in the domestic market. Monthly sales data of trade body AIOCD AWACS for July 2015 shows aggregate net sales growing 13.3 per cent (adjusted for bonus units). What will be keenly watched is the progress on the exports front, as generic sales, especially in the US and emerging markets, are the larger growth drivers. While there was a period of slow approvals for new launches in the US over the last three-four quarters, the same is gaining momentum and the approval rate is likely to be higher in the second half of the current financial year. If key launches come through, US growth could drive the revenue and margin gains for the Indian companies.

Rupee depreciation has also added to the growth outlook. Sahil Kapoor, chief market strategist, Edelweiss Financial Services, says the two per cent rupee depreciation has rubbed off positively fueling the rally. Also the large cap stocks as Sun Pharmaceuticals and Lupin after first quarter disappointment had corrected significantly. The stocks were oversold and are seeing a bounce back.

The markets' concerns on Sun Pharma had increased on Ranbaxy integration charges as also slower approvals and sales impact due to remediation measures being taken at its Halol plant. Nevertheless analysts at Morgan Stanley expect meaningful firepower in Sun's US pipeline to get unlocked once Food and Drug Authority (FDA) issues are resolved in the months ahead and added that the company’s core earnings that still face near-term challenges should improve sequentially, as they expect return of normal profitability and sales growth from FY17.

A foreign brokerage report on the pharma sector says valuations are undemanding and expects pick-up in approvals to reflect from the second half. The biggest beneficiary of a weak rupee remains Cadila Healthcare, Aurobindo and Lupin. It has upgraded Sun Pharma from 'neutral' to 'buy' with revised target price of Rs 1,070 and has raised FY17 and FY18 earnings per share by 10 per cent.