In the past month, Sun Pharma gained 7%, Aurobindo Pharma jumped 20%, Lupin and Mankind Pharma rose 9% each. The gains have pushed these stocks to their 52-week highs. The Nifty Pharma Index has gained 8% in the past month, as against the 3.4% upmove in the Nifty.
“Pharma stocks have been consolidating and are now at breakout levels,” said Rajesh Palviya, senior vice-president, research, head, technical derivatives, Axis Derivatives. “The breakout is further supported by strong numbers reported by the pharma companies.”
Aurobindo Pharma, Lupin and Sun pharma are among the stocks that are at breakout levels and the rally is likely to continue, with outperformance expected post breakout as well, he said.
Money managers said investors have not been too enthusiastic about the pharma sector in recent years, resulting in their valuations remaining cheaper compared to the market. “The pharma sector is witnessing a reversion back to mean prices due to lower base and recovery in margin and PAT growth,” said Niket Shah, fund manager, Motilal Oswal Asset Management. “This trend is expected to continue for the next 6-9 months.”
Shah advised investors to stay invested in pharma stocks for the next six to nine months as earnings of these companies could grow 20%. The Pharma Index could return 10-15% in the next six months to a year, said Palviya.”The risk-to-reward ratio of this sector is also favorable compared to other sectors and the large-cap pharma stocks have reported better results,” said Palviya. “Recovery in beaten-down stocks indicates a promising outlook in this sector.”
The Nifty Pharma index has advanced 27.11% so far this year while the benchmark Nifty gained 8.78% in the same period.
Analysts also attributed the upswing in pharma stocks to overall margin improvement in both domestic and US-dependent companies. For generic drug manufacturers and pharma companies, there is an erosion of prices every year. However, this year the price erosion is less, which is likely to boost margins.