comScore
Active Stocks
Thu Sep 21 2023 15:54:10
  1. Tata Steel share price
  2. 127.8 -0.39%
  1. HDFC Bank share price
  2. 1,553.6 -0.66%
  1. NTPC share price
  2. 238.95 -1.1%
  1. Power Grid Corporation Of India share price
  2. 201.8 -1.42%
  1. ITC share price
  2. 447.4 -1.24%
Business News/ Markets / Stock Markets/  Nifty Pharma sees muted performance in 2023; can the stocks change course going ahead?
Back

Nifty Pharma sees muted performance in 2023; can the stocks change course going ahead?

Experts point out that India is more of a structural growth story and it will remain so, which is why Indian pharma companies' valuations are at a much premium compared to the generic companies.

The growth prospects of Indian pharma companies have improved while the valuations of their shares have come down due to the correction. Photo: Pradeep Gaur/Mint (Mint)Premium
The growth prospects of Indian pharma companies have improved while the valuations of their shares have come down due to the correction. Photo: Pradeep Gaur/Mint (Mint)

While most sectoral indices rose with healthy gains, the Nifty Pharma index fell almost by a per cent in the early trade on Monday (May 29), dragged by losses in shares of select heavyweights, including Aurobindo Pharma, Sun Pharma and Divi's Laboratories.

The pharma sector appears to have lost its mojo after a dream run during the Covid-19 pandemic due to elevated raw material prices, regulatory concerns and price erosion in the generics business in key US markets. The Nifty Pharma index is flat this year so far against a two per cent gain in the benchmark index Nifty50.

However, many analysts now believe that one should look at pharma stocks for the medium to long term as the growth prospects of Indian pharma companies have improved while the valuations of their shares have come down due to the correction.

"One should look at pharma stocks with a medium-long term horizon as valuations are attractive, earnings are expected to improve and multiples may expand gradually," said Cyndrella Carvalho, a pharma research analyst at JM Financial Institutional Securities.

"The medium-term outlook for the pharma sector is positive. We expect a gradual US recovery as the pace of ANDA approvals accelerates and price erosion stabilises. US business growth will primarily come from complex generics and innovation; we believe those companies with strong R&D capabilities and low compliance risk can participate in this growth," said the analyst.

Carvalho expects the Indian Pharmaceutical Market (IPM) to grow in double digits led by 6-7 per cent price growth, 2-3 per cent new launches and 2-4 per cent volume growth in FY24.

"India markets will see field force expansion, participation in patent expiries and increased mergers and acquisitions. We expect emerging markets and the rest of the world markets to report double-digit growth as supply chain challenges and adverse forex impact eases," said Carvalho.

Carvalho observed that the March quarter earnings of the pharma sector players have been mixed primarily due to concerns around margins and lacklustre US base business growth.

"US business surprised on the upside primarily due to higher gRevlimid contribution. While other business revenues were broadly in line, EBITDA margins (ex-Revlimid) were weak due to subdued US base business growth and NLEM's impact on domestic business," Carvalho pointed out.

"Gross margins improved marginally as high-cost inventory got exhausted and we expect this trend to continue going forward. EM/ ROW markets performed well during the quarter. Notably, most companies under our coverage have strengthened their balance sheet and are scouting for inorganic opportunities,' Carvalho said.

Girish Sodani, Head of Equity Market at Swastika Investmart underscored that the pharmaceutical market in India had revenues dip for the second consecutive month in March 2022 after expanding for 17 consecutive months up until that point.

"The industry's revenue decreased by 2 per cent. The net sales and net earnings of the major companies, including Sun Pharma, Cipla, Dr. Reddy's Lab, and Abott India, decreased. Other publicly traded drug manufacturers also reported a single-digit reduction, demonstrating the extremely slow expansion of the pharmaceutical industry in India," Sodani observed.

"Low growth in the pharmaceutical industry on the basis of a few points: volumes fell for important treatments including antibiotics and supplements, a surplus of Covid-19 medicines in stock, a spike in raw material prices and lots more. The biggest challenge has been the expensive valuations in select pockets of pharma space where stocks went up three, or four times in a very short period of time because of Covid-led products driving or expected to drive their substantial growth," Sodani pointed out.

Sodani is positive about the Indian pharma players.

"The outlook is definitely positive for the pharma sector. We are expecting double-digit earnings growth over the next couple of years. That should help in maintaining the valuations of the industry. Our expectation is that it will grow at around 10-11 per cent and there will be certain companies which will be growing faster than that also depending on the portfolio," said Sodani.

He said India is more of a structural growth story and it will remain so, which is why Indian pharma companies' valuations are at a much premium compared to the generic companies.

Sodani expects double-digit earnings growth over the next couple of years which should help in maintaining the valuations and there will be some pockets in terms of companies who will be doing much better and that is why we are positive on select stocks.

The immense growth potential of the sector is a key positive for the sector.

Read more: Indian Pharma industry expected to reach about 13% in global pharma market: Report

"139 new pharma projects worth 7,000 crore got the nod in FY23. According to the EY FICCI Report, the Indian pharmaceutical market is anticipated to reach $130 billion in value by the end of 2023 along with a few government policies which give direct benefits like Export Promotion Council for Medical Devices & National Medical Device Policy 2023," said Sodani.

"Picks from the pharma sector can be Zydus Life and Cipla for the mid to long-term for an upside of 10-15 per cent," Sodani said.

Read all market-related news here

Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Updated: 29 May 2023, 10:31 AM IST
Next Story
Recommended For You
GENIE RECOMMENDS

Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

Let’s get started
Switch to the Mint app for fast and personalized news - Get App