For decades, there have been two standard defensive havens for investors during bear markets. One is fast-moving consumer goods (FMCG), the other pharmaceuticals. This is not only true for India; it is true for much more developed markets. Peter Lynch described these two sectors as perennials. People need to use soap and toothpaste daily and if they fall ill, they need medicines. Both are, therefore, stable predictable businesses without major recessionary cycles.
Indian FMCG focuses on the vast domestic market and has grown as a play on both poverty reduction and better infrastructure. Easier access to rural markets and lifestyle upgrades from populations moving up the income ladder have meant steady growth for FMCG companies. The growth accelerates when the economy is doing well but it never completely disappears.
Indian pharma is a different beast. It has a very serious export component apart from supplying domestic needs. There are pressures on both domestic and export revenue streams at the moment. On the domestic front, the government brought 348 drugs under the drug control pricing order (DCPO) 2013 in May. This puts a ceiling on the price of those drugs. The order has been challenged in court. If it is held valid, it will definitely impact profitability. Until the case is decided, there will be a great deal of uncertainty.
At the same time, the US has tightened its regulations about drug imports. Ranbaxy recently took a huge blow when it transpired that the drug major had falsified records. The US Food and Drug Administration (FDA) is now insisting on stringent inspections of manufacturing facilities and also demanding three samples of every drug for testing.
The Indian pharma industry will take a while adjusting to these twin strikes, which affect both exports and domestic sales. These changes in environment certainly affect every major, though there will be a difference of degree in impact. While the industry seeks to adjust to the new DCPO regime and rejigs to meet the new FDA standards, price trends in pharma are likely to be choppy.
We can expect news flow pertaining to these events over the next couple of quarters. This could be a great investment opportunity if valuations drop temporarily and the problems are eventually sorted out. It could also be an opportunity for traders to short specific stocks as and when there's adverse news flow. But one thing is certain, the industry will not have a smooth pricing trajectory until there is clarity on these issues.
Hence, pharma is not, at the moment, a defensive sector. If you're investing here or you are already invested here, it could be a roller-coaster ride with the sector displaying more volatility than the overall market. That is no reason to exit the sector but any investor or trader needs to be aware that the parameters have changed.
The author is a technical and equity analyst
