Nifty Pharma index sees biggest jump in four months, shows data

Pharma shares rallied on Tuesday as investors looked to prune exposure from pockets that have rallied and move money into the ones which have been laggards. 

The Nifty Pharma index finished at 12,750, up 3.1 per cent — most since May 20 and third biggest single-day gain of the year. By comparison, the Nifty50 index finished with 1.1 per cent gain. Barring two, all components of the 20-share index rallied, with Cipla and Lupin surging the most at 5.5 per cent and 4.7 per cent, respectively.

The pharma sector is seen as a defensive play. It tends to outperform the market during periods of uncertainty and could underperform during bullish spells. This was seen over the past three months as the Nifty50 rallied as much as 18 per cent after bottoming out in June but the Nifty Pharma rallied only 8 per cent.

The pharma stocks have underperformed the market even on a year-to-date (YTD) basis. Even after the latest surge, the Nifty Pharma is down 10.4 per cent YTD even as the Nifty has gained 2.7 per cent.

Currently, while the market is hovering close to its record levels, concerns around inflation, global growth outlook and interest rate increases by the US Federal Reserve have created an uncertain environment for equities. This backdrop could benefit pharma stocks, say experts, given the valuation comfort.

“A study of nearly 100 pharma, hospital, API (active pharmaceutical ingredient) and CDMO (contract development and manufacturing) players, and path labs indicate that stocks in the healthcare segment are no longer expensive. Two third of the universe is trading below their past 13-year average price-to-earnings (P/E) and nearly a similar number of companies are trading below their historical EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) multiples,” said DSP Mutual Fund in a recent note.

“Valuations are attractive and it is quite possible that this is an opportune time to scout for bottoms up opportunities in healthcare space with a time horizon of more than three years,” the note added.

On a P/E multiple basis, the Nifty Pharma index is available at close to historical valuations, while the Nifty50 is expensive, compared to historical averages.

The 12-month forward P/E for the Nifty Pharma index is currently at 25 times, same as its five-year average. Valuations have come off from a peak of 31x in January 2021. During the peak of Covid-19 selloff in March 2020, valuations for the sector had dropped to 16x.