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Despite the massive sell-off in the stock market in March, shares of pharma companies have outperformed benchmark indices. The BSE Healthcare Index gained 12.61%, outpacing the BSE Sensex, which rose 6.2% in the last eight trading sessions, starting from 23 March.

Last month, the Sensex had fallen 23%, while the BSE Healthcare Index had slipped 9.88%.

Analysts said pharma earnings are relatively secure in a market rife with fears of a slowdown due to various government restrictions as pharma offers stable revenue and profit streams. Supply chain and raw material challenges are almost similar to other sectors, but analysts said pharma producers will be better placed as demand for medicines and healthcare items remained strong.

Despite the slowdown worries, analysts expect pharma companies’ outperformance to continue.

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In better health.

According to channel checks by analysts, February and March have been the strongest in terms of growth in the domestic pharma markets. Stockpiling, by retailers and patients, is depleting inventory faster than expected, but tier I and II markets are still receiving stocks from carrying and forwarding agencies, though the frequency has reduced.

Brokerage firm CLSA said pharma companies offer secure and visible earnings growth in uncertain times driven by a robust local market and a gradually improving outlook for exports. Hence, it has tweaked FY20-22 earnings estimates for the sector by 2-3%.

“India’s market has been consistently witnessing 10-11% growth driven by a healthy mix of volume and price-led growth. The market has strong industry growth drivers, such as the rising penetration of medicines, increasing affordability and a growing incidence of chronic disorders such as diabetes, cardiac and oncology," CLSA said.

Current growth rates are therefore, expected to sustain, along with strong operating margins in the range of 25-35%, depending on a company’s portfolio mix.

“Given the recent correction for several companies, it implies attractive risk-reward, as the overall margin of safety has turned increasingly favourable at current levels. Pharma sector demand is unlikely to be affected, and production by companies should continue unabated as being classified as an essential commodity isolates Indian pharma companies from being impacted by the recent shutdowns," CLSA said.

Among stocks, Unichem Labs rose 76.81%, Piramal Enterprises Ltd gained 45.93%, while Aurobindo Pharma, Ajanta Pharma and AstraZeneca Pharma have gained 25-33% over the last eight trading sessions since 23 March. Other index heavyweights, including Dr Reddy’s Labs (up 11.95%), Cipla (up 9.52%), Biocon (up 9.05%) and Sun Pharma Industries (up 6.03%) also gained during this period.

“While the demand side (volume) continues to be robust, our channel check suggests there has been supply disruptions (more so with the lockdown since late March) due to outbreak of covid-19. This would result in near-term earnings pressure across geographies, which would be partly offset by supply opportunities, depreciating currency benefits, in our view. We revise our estimates by +4% to -12% over FY20-22 across coverage universe," said Axis Capital analysts.

While the US generics business model remains challenging due to US Food and Drug Administration issues, pricing pressure, potential penalty on US pricing litigation, and high capex-low return on capital employed, Axis Capital has upgraded Sun Pharma and Lupin to buy, given the sharp correction seen in the last three months.

Pharma companies have not been on the buyers’ radar for long. For instance, BSE Healthcare Index dropped 3.55% and 5.92% in 2019 and 2018, respectively, whereas the Sensex was up 14.38% and 5.91%.

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