Photo: Bloomberg
Photo: Bloomberg

Pharma: steady domestic demand lends support, valuations stay mixed

Sales in February rebounded, registering 12.1% growth year-on-year

Pharmaceutical companies, together with most other firms, were not spared by the coronavirus sell-off. However, most have not been as badly scarred as many front-line stocks. In the past three months, the Nifty Pharma index slipped 13.6%, contrasted with the Nifty 50’s steep 28.7% plunge. For a while now, the sector has been struck down, so investor perception that stocks are now inexpensive seems appropriate.

The sector’s decent domestic demand growth continues. Sales in February rebounded, registering 12.1% growth year-on-year. Interestingly, pharma volumes picked up a decent 3.8% in February, according to data from AIOCD Awacs, against successive declines in the two months prior. Nevertheless, the key will be whether such a step-up in volumes persists. “A pick-up in volumes in Feb-20 is an encouraging sign, and it will be interesting to see if the industry can sustain this further," said analysts at Emkay Global Financial Services Ltd in a recent note to clients.

Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

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Also, better product pricing and a strong launch pipeline are positives. Indeed, overall growth is better than the preceding two months’ single-digit growth rates, and a shade ahead of analysts’ expectations. Anti-infectives, respiratory and pain management, besides the chronic segments were the prime growth drivers.

Much of this pickup is not being attributed to any pre-buying from consumers because of the coronavirus pandemic. Besides, companies are pointing out that raw material supplies are comfortable at the moment, and some supplies from China have already started to trickle in. While these raw materials are being priced higher, with good inventory management, it is not expected to hit operating profits.

Investors are not expecting pharma product demand to be impacted on account of the shutdowns due to the spread of the coronavirus. “The sector is relatively safer in terms of a demand slowdown, as people who are taking pills for chronic ailments and even other therapies will continue to take them. Current health emergency will also have a positive rub-off impact on medicine compliance and will support demand," said Kunal Dhamesha, pharma analyst at SBICAP Securities Ltd.

However, export growth will remain a niggling worry if logistics are disrupted. But the demand for drugs is expected to remain steady. Another worry is the escalation in inspections and warning letters by the US Food and Drug Administration, seriously hampering sales to the US. But a rise in the incidence of Covid-19 cases may increase sales of pharma companies in the US.

Equity valuations of pharma companies remain mixed, while much optimism for the sector remains on the fence. Hence, only those stocks that have a well-growing domestic franchise and a decent launch pipeline in the US, may come out of the nursing homes.

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