Pharma stocks are no longer a blind defensive play

The State Bank of India result suggests that the pharma sector is not in the pink of health

Corporate results reveal more than just the financial performance of companies. Read between the lines, these results throw up interesting trends, and can often be extrapolated to other companies.

Take the example of Tata Steel. In its presentation, the company showed that iron ore prices are expected to continue remaining subdued.

Also, the pick-up in demand from the automobile sector is still flat. Similarly, Larsen & Toubro results also highlighted that there can be a pick-up in road projects, though other projects continue to remain stalled.

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Results from the banking sector highlight issues that the overall economy or other industries are facing, especially when one looks at their non-performing assets. For example, State Bank of India’s results highlight that the usual suspects like the power sector and steel have another surprising sector now contributing to the NPAs.

This is the pharmaceutical sector, which can be more damaging than the other two.

In a post-results interview, Pratip Chaudhuri, chairman and managing director, SBI, said that pharmaceutical companies are facing competition from rising imports since they have a serious cost disadvantage.

Chaudhuri went on to add that the pharmaceutical sector is their biggest worry as power is only a question of delays while the steel scenario might improve with availability of iron ore.

The new drug policy by the government to bring in more number of drugs under the price control has resulted in companies going in for cheaper imports, especially from China. It is reported that the import of bulk drugs and drug intermediates has increased by 93 per cent in calendar year 2012.

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This information can be inferred as being both positive and negative for the pharmaceutical sector. While the formulation companies, which sell the finished products in the market will benefit from lower raw material cost and thus show a better operating margin, those involved in bulk drug and drug intermediate manufacturer are likely to post poor performance.

While most of the formulation companies are in the large cap space, bulk drug companies tend to be the medium to small cap ones, which clearly need to be avoided. The defensive sector is unable to defend itself after all.