Pharma sector to remain a market favourite due to earnings visibility, say analysts

Mumbai: The healthcare index hit a record high on Friday led by a rally in sector majors Lupin, Dr Reddy’s Laboratories and Cipla on the back of positive news flow.

The sector will remain a market favourite due to earnings visibility, which does not exist for most sectors currently because of the pandemic. Analysts said there is potential for earnings to double in the next five years.

The BSE Healthcare index surged 3.5% to 20,404.76; Natco Pharma was the top gainer with a 14% jump. Dr Reddy’s was the second-best performer, ending up 10% at 5,326.70 after scaling an all-time high during the day as the company settled patent litigation for Revlimid with Celgene. This is a boost for the company as Revlimid generic cash flows should be significant for the company at over $700 million, according to analysts.

Lupin’s shares jumped 4.6% and those of Cipla gained over 7% after Perrigo announced a voluntary recall of its albuterol sulphate inhalation aerosols in the US on concerns that some units may not dispense properly due to clogging issues. Lupin and Cipla, which are competitors of Perrigo in the $850 million-$900 million US albuterol sulfate market, could potentially get a 4-6% boost in earnings per share due to this opportunity, according to foreign brokerage Macquarie.

C15ET Bureau

The rally in pharma stocks brought the total gain in BSE Healthcare to 86.4%, from its 2020 low of 10,947.99 to a close of 20,404.76 on Friday. The Sensex, which hit a 2020 low of 25,638.9 on March 24, has gained 51% since then to close at 38,845.82 on Friday.
“Investor preference for defensives is one part of the story. Results are indicating good traction in business and the pandemic has been responsible for accelerating the process of growth due to higher demand for drugs,” said Vinit Sambre, head of equities at DSP Investment Managers. “After four or five years in which companies faced US FDA-related issues, we are seeing improvements on that front in some pockets, and approvals are coming through. The fundamental cycle is moving to a bit of optimism from negative.”

From March 24, when the benchmark hit a 2020 low, pharma stocks have surged as much as 516%. Aarti Drugs has taken the lead among pharma stocks followed by IOL Chemicals, Marksans Pharma, Laurus Labs, Neuland Laboratories, Jubilant Life Sciences and Aurobindo Pharma, which gained 154-435%.

Sailesh Raj Bhan, deputy chief investment officer at Nippon India Mutual Fund, said return expectations from the sector should be in line with earnings growth as a large part of re-rating gains has been made.

“The sector has seen a decent rally over four five months. Prior to that, we had three four years which were bad for the sector,” said Bhan.