Investors turn to pharma stocks amid market crash; Nifty Pharma gains 1.5%

Pharma stocks were holding their ground on Friday even as the rest of the market was painted red amid feeble global cues. At 11:50 AM, Nifty Pharma index was trading 0.2 per cent higher on the National Stock Exchange (NSE), compared with a 430-point or nearly 3 per cent cut in the Nifty50 index. In the intra-day trade, the Nifty Pharma index had gained 1.5 per cent on the NSE, and had hit a high of 12,322.

Among individual stocks, Lupin zoomed 3.4 per cent in the intra-day trade and hit a high of Rs 1,060, Sun Pharmaceuticals advanced 2 per cent, and Dr Reddy's Labs gained 1.7 per cent. Alkem Labs, Cadila Healthcare, Divis Labs, Cipla, and Aurobindo Pharma too rallied in the range of 1 per cent and 3 per cent.

So far in the calendar year 2021, the Nifty Pharma index has slipped 6 per cent on the NSE, as against a 7 per cent gain in the Nifty50 index, as investors booked profit post a stupendous rally in CY 2020 where the index zoomed 60 per cent at the bourses, compared with a 15 per cent rally in the frontline Nifty index.

Siddhant Khandekar, analyst at ICICI Securities opines that the sector remains in a consolidation mode after a sharp outperformance in calendar year 2020. That said, he remains positive on the sector from a long-term perspective as fundamentals remain strong going ahead.

PLI boost

On Wdnesday, February 24, Centre announced the contours of the second Production Linked Incentive (PLI) scheme for the pharmaceutical industry which covers pharmaceutical formulations and API/Intermediates. This follows the earlier PLI scheme that primarily covered API and intermediates where India is highly dependent on imports. Moreover, unlike the earlier scheme, this scheme is focused on incentivizing exports as almost two thirds of incremental sales from the scheme is likely to be for exports, as per the government.

Analysts at Nomura remain positive on the proposal and estimate the annual incentive in the range of Rs 3,800-4,300 crore in FY24-27. "While the scheme incentive is likely to be divided unequally among the players as it will depend on companies eventually selected under the scheme, we think most of the large listed players with strong manufacturing base and intent to expand will benefit. This includes Aurobindo, Dr Reddy's, Lupin, Cadila, Cipla and Sun Pharmam" it said in a report dated February 25.

The recently approved PLI scheme allocates 73 per cent of the incentive (Rs 11,000 crore out of Rs 15,000 crore) for players with Global Manufacturing Turnover of more than Rs 5,000 crore (FY20). The brokerage expects 15-20 companies to be eligible for this and estimate the total incentive at 4-5 per cent of these companies' FY20 Ebitda.

Earnings beat in Q3FY21

The December quarter earnings for the sector largely met the Street’s elevated expectations with no major negative surprises (ex-Natco & Shilpa Medicare) even as the easing of supply disruptions resulted in a muted US & API performance across the board.

Analysts at JM Financials said that firms under their coerage posted a 9 per cent YoY growth in revenue with Ebitda and net profit witnessing 27 per cent and 50 per cent YoY growth, respectively. Seven of 12 companies in their coverage universe delivered a beat on estimates with Sun & Cipla witnessing the highest earnings upgrades. Domestic formulations (14 per cent YoY growth for our coverage universe vs. market growth of 6 per cent) and RoW (15 per cent YoY growth for our coverage universe) segments were the key growth drivers during the quarter.

While domestic outperformance in case of Cipla, Cadila & Jubilant continued to be partly driven by Covid-related opportunities, Sun & Alembic delivered market-beating growth despite no meaningful Covid contribution. 

Going ahead, analysts at ICICI Securities expect costs related to promotional/marketing activities to come back to pre-Covid levels as the pandemic situation continues to ease out and MR activity normalises.