By Bloomberg

By Bloomberg

Pharma sector unlikely to sustain current premium over Sensex

Pharma sector unlikely to sustain current premium over Sensex

We tested the pharmaceutical sector’s vulnerability to macro headwinds after it outperformed the broader market by a sharp 7% in the past one year and have arrived at the conclusion that the current premium of 50% relative to the Sensex is unlikely to sustain because of two reasons.

By Bloomberg

Also See | Changing Dynamics (PDF)

We believe the international growth drivers led by the US generics market (which is in a multi-year cyclical upturn given the impending patent cliff), and emerging markets (owing to favourable demographics and similarity with the domestic market) still hold and would partially cushion any erosion in PE multiple.

Torrent Pharmaceuticals Ltd (TPL) and Glenmark Pharmaceuticals Ltd (GPL), owing to their discounted valuations and strong earnings trajectory are our top buys whileSun Pharmaceutical Industries Ltd’s near-term growth looks fully priced in and therefore gets our hold rating. We assign a sell rating to Cipla Ltd because of muted growth profile and declining return ratios. We also have a sell rating on Cadila Healthcare Ltd owing to lack of clarity on growth drivers for its $3 billion revenue target by 2015. Barring TPL and GPL, FY13 profit after tax estimates for other companies in our coverage universe are 4-10% below consensus estimates, given our expectations of a slowdown in domestic market growth and pressure on margins.

Edited excerpts from a report by Nirmal Bang. Send your comments at mintmoney@livemint.com.

Graphics by Yogesh Kumar/Mint

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