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While multinational pharmaceutical companies have been laggards on the returns charts through the past few years vis-à-vis their large-cap Indian peers, it is expected they will bridge the gap due to regulatory clarity and operational gains.
The interest in pharma MNCs has increased through the last few months, considering the government has retained the 100 per cent foreign direct investment (in completely new projects, as well as in those already in progress) clause and there is clarity on pricing. These factors have started reflecting on their stocks, which have, through the last one-three months, risen six-21 per cent.
Ranjit Kapadia of Centrum Broking says, “Sales volumes have gone up after the substantial fall in (product) prices for some MNCs. Given the competitive pricing of MNC brands, they are likely to gain share from local players.”
Also, the sector is expected to grow at a healthy pace. Not surprisingly, companies are investing to expand in India. Recently, GSK Pharma announced an investment of Rs 864 crore towards setting up a manufacturing facility in India.
Kapil Bhatia, assistant vice-president, Systematix Capital, says, “The healthcare sector is likely to grow 15 per cent a year, as India continues to be under-penetrated, with a strong demand for quality medicines. In addition, India’s perception of being a low-cost, high-quality manufacturing base has induced several multinationals to set up manufacturing assets in India that can cater to their global requirements.”
Analysts say high dividends, growth potential and buyback announcements are likely to keep investor interest in these stocks high.
So far, MNCs haven’t performed well, losing to smaller players on one side and being reluctant to introduce patented products on the other. While the pricing overhang is over, most MNCs are yet to resolve trade-related issues. This is also being reflected in the October sales data — for the first time this year, sales of pharma MNCs were lower on a year-on-year basis.
Analysts say with the rupee gaining, the forex losses of MNCs that import sizeable volumes will fall. And, given the improving outlook, they expect good returns from Abbott and Pfizer, while Glaxo’s rich valuations mean investors should wait for a good entry point.
Abbott IndiaThe interest in pharma MNCs has increased through the last few months, considering the government has retained the 100 per cent foreign direct investment (in completely new projects, as well as in those already in progress) clause and there is clarity on pricing. These factors have started reflecting on their stocks, which have, through the last one-three months, risen six-21 per cent.
Ranjit Kapadia of Centrum Broking says, “Sales volumes have gone up after the substantial fall in (product) prices for some MNCs. Given the competitive pricing of MNC brands, they are likely to gain share from local players.”
Also, the sector is expected to grow at a healthy pace. Not surprisingly, companies are investing to expand in India. Recently, GSK Pharma announced an investment of Rs 864 crore towards setting up a manufacturing facility in India.
Kapil Bhatia, assistant vice-president, Systematix Capital, says, “The healthcare sector is likely to grow 15 per cent a year, as India continues to be under-penetrated, with a strong demand for quality medicines. In addition, India’s perception of being a low-cost, high-quality manufacturing base has induced several multinationals to set up manufacturing assets in India that can cater to their global requirements.”
Analysts say high dividends, growth potential and buyback announcements are likely to keep investor interest in these stocks high.
So far, MNCs haven’t performed well, losing to smaller players on one side and being reluctant to introduce patented products on the other. While the pricing overhang is over, most MNCs are yet to resolve trade-related issues. This is also being reflected in the October sales data — for the first time this year, sales of pharma MNCs were lower on a year-on-year basis.
Analysts say with the rupee gaining, the forex losses of MNCs that import sizeable volumes will fall. And, given the improving outlook, they expect good returns from Abbott and Pfizer, while Glaxo’s rich valuations mean investors should wait for a good entry point.
The stock of India’s largest pharma company, in terms of market share, has risen 11 per cent since the beginning of November due to better-than-expected results for the September quarter and good prospects. While two of its largest selling products are under price control, Abbott has managed to improve sales growth. The 10 per cent year-on-year growth in sales during the September quarter came on the back of good performances by seven of its top 10 products (which account for 56 per cent of domestic revenues). Also, the company has been able to improve its earnings before interest, tax, depreciation and amortisation margin due to lower costs and changes in product mix. Margin gains and higher other income helped improve net profit. A good performance during the quarter led to earnings upgrades, with Abbott expected to increase its revenue 13-14 per cent a year, through the next two financial years. Given the Bloomberg consensus target price of Rs 1,750, there is an upside of about 18 per cent.
GlaxoSmithKline Pharma has been one of the worst affected companies, bearing the brunt of India’s new drug pricing policy. Centrum Broking estimates the company’s top five products, accounting for about a quarter of revenues, are under price control, leading to sharp decline in prices. While the company estimates a five per cent fall in annual sales due to the new pricing rules, most analysts have cut their earnings estimates for 2014 (by 15 per cent) and expect muted sales growth of seven-eight per cent. Given the stock is trading 35-40 times its 2014 earnings, there is little upside expected in the near term. The only positives are the Rs 1,800-crore (Rs 214 a share) of cash on its balance sheet, which could be used for dividend or acquisition and the resolution of trade-related issues. A buyback by its parent could also be a trigger for the stock. A reasonable correction may also make it attractive.
Pfizer
Pfizer, slated to merge with Wyeth Ltd, continues to grow well, driven by its five top brands — Becosules, Magnex, Minipress-XL, Claribid and Lyrica, which are growing 11-20 per cent year-on-year, much faster than the market growth. The company, which remains unaffected by the new pharma policy, has been taking steps to improve margins. The restructuring of marketing functions drove Pfizer’s margins during September quarter, said Kapadia. For the quarter, Pfizer reported 11 per cent year-on-year growth in revenue, a 210-basis-point margin improvement and a 25 per cent jump in net profit. The debt-free company, with cash equivalent of Rs 495 a share (Rs 1,500 crore) may use this for inorganic growth. After the September quarter results were announced, Kapadia increased his earnings-per-share estimate for FY14 and FY15 six per cent and three per cent, respectively, with a target price of Rs 1,640. Of the four analysts polled by Bloomberg since November, three have ‘buy’ ratings, while one has a ‘hold’ rating, with a consensus target price of Rs 1,517 for the stock, trading at Rs 1,194.
