Reading the vital signs: Pharma sector, the market's trusted antidote

The pharma index was the only healthy pulse amid Friday's market declines

Amid valuation concerns, investors are playing it safe and turning to defensive sectors. The pharmaceutical (pharma) sector has benefited from this shift, attracting investors seeking steady cash flows. On Friday, while most sectoral indices closed in the negative, the pharma index was the only one to end with gains.

Over the past month, the National Stock Exchange Nifty Pharma, with a gain of 7 per cent, has outperformed other sectoral indices, while the Nifty 50’s returns were capped at 1.6 per cent.

Over the past three months, the pharma index was the second-highest gainer with a 14 per cent return, compared to a 10 per cent return for the Nifty 50.

Among the top-listed pharma companies, average returns over the past few months have exceeded 20 per cent, except for Cipla.

The recent boost for listed pharma majors has come from their robust performance in the April-June quarter. Most major companies either surpassed or met Street estimates for sales, with operating margins and net profits exceeding expectations in many cases.

Revenue growth has been driven by strong performance in both the Indian pharma market and the US generics segment. Domestic formulation sales saw an 11.5 per cent growth compared to the year-ago quarter, supported by sustained growth in chronic therapies and favourable seasonal factors, according to Motilal Oswal Research. Margins at the gross level were bolstered by lower raw material costs.

The US business grew by 8 per cent, driven by traction in specialty products and stabilising price erosion in the mid-single digits. The brokerage anticipates that earnings growth will continue in the coming quarters, supported by ongoing niche launches and improved operating leverage.

In the generics space, Dr Reddy’s Laboratories led revenue growth with a strong 14 per cent increase. Much of this outperformance is attributed to the ramp-up of the generic version of the cancer drug Revlimid in the US market. The US segment delivered 20 per cent growth year-on-year, fuelled by higher volumes and contributions from new launches.

JM Financial Research has a ‘buy’ rating on the stock, noting the positive potential for core earnings due to earnings-accretive transactions like the recent acquisition of the nicotine replacement therapy business of British consumer health care firm Haleon. The stock trades at 21–22 times 2026-27 earnings per share and remains attractive compared to largecap peers.

The largest listed player, Sun Pharmaceutical Industries, had mixed results, with operational performance exceeding estimates but muted revenue growth. Although the India business was strong, overall sales growth of 6 per cent was hindered by flat sales in the US.

India formulations outpaced industry growth with a 16 per cent increase, benefiting from better field force penetration and new launches. However, the US business suffered from low contributions from Revlimid and seasonal weakness in Levulan (for skin overgrowth) within the specialty portfolio.

PhillipCapital Research expects continued healthy momentum in the specialty business, driven by portfolio expansion and drug extensions to non-US markets. Steady domestic formulations and the ramp-up of Revlimid should drive growth. The launch of Ilumya (a psoriasis treatment) in China may also yield positive surprises in the near future.

Analysts Surya Patra and Bhavya Sanghavi of the brokerage have raised their 2024-25/2025-26 (FY26) earnings estimates by 8–9 per cent, factoring in better-than-expected domestic performance and strong margins.

Cipla’s overall earnings were broadly in line with Street expectations, with revenue growth largely driven by the US market. The company achieved its highest-ever quarterly sales in the US at $250 million, thanks to increased momentum in its differentiated portfolio. However, the India business growth was underwhelming, impacted by changes in the trade generics distribution model.

Analysts Tushar Manudhane and Akash Manish Dobhada of Motilal Oswal Research project a 12 per cent earnings growth over 2023-24 through FY26 for Cipla and have reiterated a ‘buy’ stance. The company is building a niche product pipeline in the peptide/inhaler space within the US generics segment, and a change in its distribution model should help revive growth in the trade generics business. The operating profit trend remains strong in the consumer health segment, according to analysts.

Torrent Pharmaceuticals’ 10 per cent revenue growth for the quarter was driven by its India business, which saw a 14 per cent increase. Gains in the Indian market resulted from new launches in the cardiac and diabetes segments, positively affecting margins. Price increases (6–8 per cent annually) continue to drive growth in India, while Torrent plans to add 300–400 medical representatives in the country each year, according to ICICI Securities.

Although the brokerage has raised its operating profit estimates due to higher margins, they have lowered its rating, given the sharp run-up in stock prices.