Pharma stocks may hold ground as volatility grips global markets

Stock market experts are of the opinion that pharma stocks may prove safer bets in the long term, given their steady business prospects.

The Nifty Pharma index was down 1.76 per cent on Friday compared to a 568-point or nearly 3.8 per cent slide in the Nifty50 on weak global cues.

So far, in CY21, the Nifty Pharma index has slipped 7.6 per cent, against a 3.9 per cent gain in the Nifty50, as investors booked profit post a stupendous 60 per cent rally in CY20, compared with a 15 per cent rally in Nifty50.

Consequently, price-earnings (PE) valuation of the Pharma index has softened to 33 times versus 40 times for Nifty50. Siddhant Khandekar, analyst at ICICI Securities, is of the opinion that the sector remains in a consolidation mode after a sharp outperformance in calendar year 2020. He remains positive from a long-term perspective as fundamentals remain strong.

PLI boost

Last Wednesday, the Centre announced the contours of the second production-linked incentive (PLI) scheme for the industry which covers pharmaceutical formulations and API/intermediates. 

This follows the earlier PLI scheme that primarily covers API and intermediates where India is highly dependent on imports.

Moreover, unlike the earlier scheme, this plan focuses on incentivising exports as almost two thirds of incremental sales from the scheme are likely to be for exports, according to the government.

Analysts at Nomura remain positive on the proposal and estimate the annual incentive in the range of Rs 3,800-4,300 crore in FY24-27. 

“While the incentive is likely to be divided unequally among players, we think most of the large listed companies with strong manufacturing base will benefit. This includes Aurobindo, Dr Reddy’s, Lupin, Cadila, Cipla and Sun Pharma,” it said in a report.

The recently-approved PLI scheme allocates 73 per cent of the incentive (Rs 11,000 crore out of Rs 15,000 crore) for players with global manufacturing turnover of more than Rs 5,000 crore (FY20). The brokerage expects 15-20 companies to be eligible for this.

The sector’s December quarter (Q3) earnings had largely met Street’s elevated expectations with no major negative surprises (except for Natco and Shilpa Medicare).