The pharma sector’s stock performance has been broadly in line with the markets

After a stellar rally that lasted for over five years, the performance of pharma stocks has been in line with the benchmark indices since the last Budget. The BSE Healthcare Index rose by 38.5 per cent while Sensex and Nifty gained around 35 per cent.

The flight of capital, however, from stocks in the defensive sectors such as pharma, consumer goods and IT to cyclical sectors such as construction, power, oil and gas and metals on expectation of economic recovery led to this sector underperforming in the last ten months.

Exports push

This comes at a time when the sector’s fundamentals continue to remain robust. Pharma companies managed to post healthy growth in revenue and profits in 2013-14. The revenue of 15 companies constituting the BSE Healthcare Index (excluding Strides Arcolab) jumped 15 per cent in 2013-14, while profits rose 9 per cent during this period. Strong growth in exports helped Indian drug makers ward off challenges in the home market. Price cuts due to f the new drug pricing policy and strike by drug dealers demanding higher margins took a toll on the sector’s performance in the domestic market. But healthy ramp up in key overseas markets such as the US — driven by new product launches — coupled with rupee weakness against the dollar more than compensated for the slow growth in the Indian market.

Even as the performance of large-cap pharma stocks failed to keep pace with the market, there were pockets of opportunity in the mid- and small-cap pharma space.

For instance, the stocks of Aurobindo Pharma and Granules India have quadrupled since the last budget. Likewise the stock of Ajanta Pharma saw a three-fold jump and Shasun Pharma more than doubled during this period. While growth in both domestic and overseas market is expected to be healthy, which way the rupee moves will be the key factor to watch out for.

(This article was published on June 12, 2014)
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