Analysts said the recent surge in pharma shares is part of a catch-up rally as many of them have not participated in the broader market upmove in recent years.
The Nifty Pharma Index jumped 1.56% on Monday to close at 15,479.25 as against the 0.4% advance in the benchmark Nifty. While the pharma index has beaten the Nifty so far in 2023, its outperformance has only widened since July 20 – when the Nifty came close to the milestone of 20,000 – after which the index has struggled to maintain its bullish moves. The Nifty has fallen close to 2% since then, while the Nifty Pharma index gained 8.3% in this period.
Analysts said the rally in the pharma sector is also driven by improvement in the sector’s business outlook. Sun Pharma, Zydus Life, and Torrent Pharma are analysts’ top picks.
Stocks such as Abbott India, Cipla, Dr Reddy’s Lab, Torrent Pharma, Neuland Lab, Ajanta Pharma, Syngene International, and Alkem Laboratories hit all-time highs in the past week.
“Pharma is the best pick supported with stable forex revenue even if the market turns defensive as the industry valuation can be re-rated further with the earnings outlook for the next 1-3 years is forecasted to be robust,” said Vinod Nair, head of research at Geojit Financial Services. “Positively, the approvals from the USFDA have been substantiated during the year, reducing operational risk and enlarging business demand while the cost of chemical raw materials has reduced during the year, uplifting EBITDA margins for formulation companies.”
Foreign portfolio investors (FPIs) have bought pharma shares worth ₹6,725 crore between May and July. Cipla shares gained 32% in the last three months, while Sun Pharma and Divi’s Lab gained nearly 19%. Torrent Pharma and Zydus Lifesciences surged 25% each in three months.The outlook for the pharma sector was weak during the post-COVID periods of FY22 and FY23, when the price erosion of the US pharma sector intensified the weak performance. The price erosion is now believed to be over and expected to bring back pricing power to Indian players, said analysts.