Why this sector will not provide returns in this bullish market
Updated on 30 May 2017
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The ongoing bull run on Dalal Street must be a dream run for equity investors. But investors in pharma companies are still waiting for their turn to see their investments in the green.

The Nifty Pharma index has plunged over 9 per cent in last one year, whereas the benchmark Nifty50 has gained 22 per cent in the same period till May 22.

Brokerage Credit Suisse said the pharma sector has been de-rated 10 per cent over the last one year, but with price erosion expected to increase, a further de-rating is likely.

The Nifty Pharma index declined to 9,959 on May 22, 2017 from 10,958 on May 23 last year. On the other hand, the Nifty50 index jumped from 7,731 to 9,438 in the same period.

Among the 10 components of the Nifty Pharma index, seven are trading in the red with Divi’s Labs slipping the most at 42 per cent in last one year. It was followed by Glaxosmithkline Pharmaceuticals (down 28 per cent), Aurobindo Pharma (down 24 per cent), Glenmark Pharma (down 22 per cent), Sun Pharma (down 18 per cent), Dr Reddy’s Labs (down 14 per cent) and Lupin (down 13.50 per cent).
On the other hand, shares of Piramal Enterprises, Cadila Healthcare and Cipla gained 95 per cent, 41 per cent and 13 per cent, respectively.

The outlook of the sector is bleak and some of the market experts have cut target prices of pharma stocks in the recent past.

On the expected de-rating, Credit Suisse in a research note said, “Higher price erosion may lead to lower earnings growth and returns and, therefore, could trigger a de-rating. We expect price erosion to increase to 10-12 per cent (from 7-8 per cent currently) due to higher competition from increasing FDA approvals, which is likely to grow over 50 per cent in next two years, increasing channel consolidation where post Express Script joining the Walgreen consortium, top three buyers now account for around 90 per cent of generic purchases. We are surprised with the high pace of new entrants, where over 60 firms received their first approvals in last three years.”
A stronger rupee can help check inflation as it would pull down commodity prices, but export-reliant companies from IT firms and pharma segments are likely to take up to 4 per cent hit on earnings, industry insiders say.

The rupee has gained around 5 per cent against the US dollar since the beginning of the year, strengthening significantly after the Reserve Bank of India (RBI) changed its policy stance on credit cost. This is impacting companies that import less and export more.
Global brokerage firm CLSA is positive on the rupee. Laurence Balanco, Global Technical Analyst, CLSA, in a chat with ETNow said, “The rupee has broken out of the double top it made earlier, which triggered the rupee’s strength. We have got a target of 62 for the currency. Globally, the dollar index has fallen back into its old trading range that we saw all through 2015. That index essentially is being driven by the euro’s strength. Broadly, the Indian rupee is among the strongest emerging market (EM) currencies, other being Taiwanese dollar and Korean won,”

In the latest research report, Credit Suisse slashed the target prices for Lupin to Rs 1,200 from Rs 1,250 earlier, Dr Reddy’s Labs to Rs 2,200 (from Rs 2,300), Sun Pharma to Rs 600 (Rs 620), Cipla to Rs 655 (Rs 675), Aurobindo Pharma to Rs 750 (Rs 910), CadilaBSE 2.92 % Healthcare to Rs 540 (Rs 560), Glenmark to Rs 700 (Rs 760), Torrent Pharma to Rs 1,550 (Rs 1,770).
Share of Lupin, Sun Pharma, Aurobindo Pharma, Cipla, Cadila and Torrent Pharma were trading at Rs 1,262, Rs 640, Rs 576, Rs 561, Rs 458 and Rs 1,304, respectively, on May 22.

“We reiterate underperform ratings on Lupin and Dr Reddy’s and are neutral on Sun Pharma. We prefer Cipla and Cadila thanks to lower base and good pipelines,” said Credit Suisse.