Part of this upswing, can be attributed to the perception of being a ‘defensive’ sector in a weak market. Stock-specific developments have also played a role.

As a result, the price-to-earnings multiples of the top ten pharma firms, by market value, has gone up to 24.3 currently, from 23.5 in January. Good guidance has been factored in.

Large-cap pharma companies consist of generic players (export-focussed), formulation based companies and a few pharma contract manufacturers. With the US generic landscape becoming tougher, Ranbaxy, Sun Pharma and Dr Reddys have been compelled to target one-off upsides and also collaborate with innovators. This gives their earnings both sustainability as well as visibility.

The 2007-08 results of top five companies have shown 7 per cent rise, which appears muted on account of flat growth in Cipla and de-growth in Dr Reddys.

The recent run-up in other frontline stocks has pegged up the estimated 1-year forward valuations of the top five companies to 21 times their 2008-09 earnings per share, in comparison to 15 times for Sensex. These indicate higher expectations of growth.

Preferred picks: We believe Cipla is over-valued, while room for price appreciation in Ranbaxy is capped. Sun Pharma is our best pick in large-cap pharma space. In contract manufacturing space, we favour Dishman Pharma and Piramal Healthcare.

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