Nifty Pharma jumps 14% YTD, outshines Nifty 50; is there more upside ahead?

The Nifty Pharma index has gained 14.53% year-to-date (YTD), significantly outperforming the Nifty 50, which has declined 7.87% over the same period. The sector's strong performance has been driven by improving earnings visibility, resilient growth in the domestic formulations business and a shift towards defensive sectors amid heightened market volatility, according to experts.

Pharmaceutical stocks have also benefited from new product launches, strong domestic execution, and steady margin expansion, making the sector a preferred choice for investors amid an uncertain macroeconomic environment.

In contrast, the Nifty 50 has lagged due to a combination of global and domestic headwinds. Escalating geopolitical tensions in the Middle East, a sharp rise in crude oil prices, persistent foreign portfolio investor (FPI) outflows and concerns over inflation have weighed on investor sentiment.

The benchmark index has also faced pressure from weakness in heavyweight sectors such as financials, IT and energy, while uncertainty around the US Federal Reserve's policy outlook and elevated market valuations have kept investors cautious. Against this backdrop, investors have increasingly rotated into defensive sectors such as pharmaceuticals, which offer relatively stable earnings and lower sensitivity to economic cycles.

Domestic formulations to remain the key earnings driver

Brokerages expect the pharmaceutical and hospital sectors to deliver healthy revenue growth in Q1FY27, supported by a strong recovery in domestic formulations following the GST-related transition and resilient demand across speciality healthcare segments.

Sunny Agrawal, Head of Fundamental Research at SBI Securities, said the June quarter is likely to witness healthy year-on-year revenue growth for most pharmaceutical companies, led by sustained strength in the domestic formulations (DF) business. He expects chronic therapies to continue outperforming the broader Indian Pharmaceutical Market (IPM), while the US business is likely to remain mixed.

According to Agrawal, new product launches and better operational execution should support US revenues, but the base business could remain under pressure due to lower generic Revlimid sales and continued pricing erosion in select generic segments. As a result, he believes domestic formulations will remain the primary earnings driver for the sector in the near term.

On profitability, Agrawal expects margins to remain broadly stable as companies continue to invest in research and development, speciality portfolios and commercialisation initiatives, including GLP-1-related opportunities and other differentiated product launches.

Despite the recent re-rating in pharma stocks, Agrawal remains constructive on the sector's medium-term outlook, citing sustained growth in domestic healthcare demand and expanding global outsourcing opportunities in the CDMO and API segments. However, he believes any further upside is likely to be driven more by earnings growth than valuation expansion.

Among his preferred long-term picks, Agrawal highlighted Sun Pharma, Ajanta Pharma, Alkem Laboratories, Divi's Laboratories and Zydus Lifesciences.

Technical Views

Sudeep Shah, Head of Technical and Derivatives Research at SBI Securities, said the Nifty Pharma index continues to exhibit a higher-high, higher-low pattern, reaffirming the prevailing bullish trend. The index is trading comfortably above its key short- and long-term moving averages, indicating sustained buying momentum.

He noted that the pharma index has been consistently outperforming the Nifty 50, as reflected in the steadily rising Pharma/Nifty ratio, highlighting the sector's relative strength. On the weekly charts, the Average Directional Index (ADX) is trending higher, signalling strengthening trend momentum, while the MACD remains positively sloped, reinforcing the bullish outlook.

According to Shah, the 25,300-25,350 zone, which coincides with the previous swing low and the 20-day exponential moving average (EMA), is likely to act as a crucial support level. As long as the index remains above this range, he expects the broader uptrend to stay intact with room for further gains.

Further, Hitesh Rathi, Technical Analyst - Equity & Derivatives at Angel One, said the technical structure of the Nifty Pharma index remains firmly constructive despite its strong rally so far this year. He pointed out that the index continues to trade in a well-established primary uptrend across multiple Point & Figure chart timeframes, with a running Double Top Buy signal visible on the daily 0.25%, 1% and 3% × 3 Point & Figure charts, reflecting the strength and consistency of the ongoing trend.

Rathi added that the sector continues to display exceptional relative strength against both the Nifty 50 and the Nifty 500, indicating broad-based outperformance across the market.

However, he cautioned that the sharp rally has pushed the index well above its key moving averages, making it somewhat stretched in the near term. As a result, he believes investors may be better served by waiting for either a healthy price correction or a period of consolidation before initiating fresh positions.

Despite the near-term caution, Rathi said the broader technical setup remains decisively bullish, with no significant signs of a trend reversal, and expects the ongoing uptrend to continue over the medium term.

Disclaimer: This story is for educational purposes only. The views and recommendations above are those of individual analysts or broking companies, not Mint. We advise investors to check with certified experts before making any investment decisions.