In recent times, only two sectors - infotech and pharmaceuticals - have bucked the general downtrend and have attracted higher trading interest. In previous rallies, the upswing was seen across the entire sector.
This time around only sound local companies and multinational (MNC)pharma stocks (as the patents norm in confirmation with WTO) dominated the rally. According to a report by P-Sec, an institutional brokerage, MNC stocks will continue to outperform till such time the economy shows clear signs of a turnaround.
The report has compared the performance of leading MNC pharma stocks and leading local pharma companies.
From a sample-size of seven companies from each side, the report concludes that multi-national companies on an average have posted a net profit growth of 48.8 per cent (as per the latest results, either quarterly or half yearly).
According to the report, the higher discounting enjoyed by multi-national companies' scrips bear testimony to the higher earnings potential of these companies.
Despite lower sales these companies have posted a fantastic growth on account of the lower fixed costs and the benefits accruing out of strategic restructuring exercises undertaken by them over the past few years.
The report adds that greater cash flows, growth borne not necessarily out of utilisation of these assets, besides the constant support of the parent company, would accentuate the growth-curve of these companies.
While the impressive performance of MNCs is attributed to a higher earning potential, a distinction as regards domestic pharma stocks can be seen, according to the report. Ranbaxy Labs, the largest entity has been a marked as an underperformer because of its high dependence on anti-biotics.
In contrast, Dr Reddy's Labs has grown despite its exposure to the Russian markets.
This has been mainly on account of its wider therapeutic range, successes in new molecule research and acquisition of new brands.
The report states that since the economic turmoil is expected to last for some more time, mass consumption of therapeutic products will continue to show low demand growth while, the drivers would be lifestyle-based drugs like cardiovasculars, female healthcare drugs and AIDS.
The report states that the sector will continue to outperform in the medium-term till such time as the economy shows clear signs of a turnaround.
The fancy for MNC stocks would continue as there is a strong possibility of a dilution of the Drug Price Control Order norms as both the industry bodies (IDMA & OPPI) are clamouring for it. Since MNCs have significant exposure to such drugs (vitamins, vaccines, antibiotics) they would be the biggest beneficiaries of any move in this direction.
Technology would continue to play a major role in the future. Genetically engineered potatoes that can grow proteins and anti-bodies for staving off diseases in the humans consuming them and a designer drug based on the bacterium used to ferment salami and sauerkraut are being tested as substitutes for anti-bacterials.
Till 1995, original molecule research was confined to around 500 drugs.
Now the worlds' 9th largest company, Smithkline Beecham Plc alone was looking at 70,000 such candidates.
As such, developments would call for greater competence, a steady pipeline (whether through a tie-up or in-house) would be important.
