 "What’s ailing the pharma sector?")
Technically speaking, there are various ways in which one can find out the strength of a sector in the market. The most popular being the relative strength index or a RSI, but this indicator gives the strength over a fixed period of time, say 21 days. A better way used by traders is to find the proximity of the index from its 52 week high and low.
Using this measurement scale on various sectoral indices on the current market one finds that almost all sectors are trading closer to their 52 week highs except for two – information technology (IT) and pharma.
The IT sector has been hit by a global slowdown, lower discretionary spending and a structural change which is resulting in increased automation and digitalisation which the Indian industry is still grappling with.
The IT sector has been hit by a global slowdown, lower discretionary spending and a structural change which is resulting in increased automation and digitalisation which the Indian industry is still grappling with.
The other main foreign exchange earner for India, pharma industry posted subdued results, leading to depressed share prices, except for Cipla that saw a jump in its share price post its results. Increased global liquidity on account of quantitative easing announced by various banks and low interest rates has flooded world equity markets with easy money. The risk-off trades generally do not see buying in pharmaceutical sector which is considered as defensive. But even during the pre-Brexit era, the sector barely witnessed any investor interest.
One of the reasons that investors have stayed away from the sector is because of repeated clashes with the US FDA who have been raising critical questions about the manufacturing practices in Indian companies. Even the best of Indian companies have been pulled up by US FDA recently. Increase in frequency of inspection, resulting in companies being pulled up for negligence which was overlooked earlier, has not gone down well with the investors.
A Credit Suisse report shows that apart from Glenmark, all other companies posted negative growth in the US market in June 2016 quarter as compared to the March 2016 quarter. A Crisil report says that increased regulation has resulted in exports growth to the developed market falling to single digit as compared to over 20 per cent earlier and operating profitability dropping by 400 basis points. A wait and watch policy is prudent under such a scenario.
Apart from US FDA scare, growth is also an issue with pharmaceutical sector. Crisil in another report points out that revenue growth and increase in research and development expenses will moderate profit growth of Indian pharmaceutical companies. The report says that exports of generic drugs to the US will slow down by 300 basis points to 10-12 per cent in the medium term as only about $100 billion worth drugs will go off-patent as against $180 billion that went off-patent during 2011-14. US markets account for 40-50 per cent of sales of Indian pharmaceutical companies.
While the US markets have not been too good for Indian pharmaceutical companies, even the domestic markets have not been forgiving. The government has imposed price ceiling on some drugs and spoken of tightening the screws further.
In such a scenario where growth visibility is low and the sector can be subjected to sudden inspection which can throw surprises, investors cannot be blamed for avoiding the space, especially when others stocks are offering more clarity.
