Pharma's Nifty-Beating Performance: The Key Drivers Of The Rally
A shift to defensive play by investors amid a broader market rally has also contributed to pharma's gain.
The surge in stocks of Indian pharmaceutical companies in 2024 that have outperformed the benchmark is driven by positive earnings momentum and outlook, defensive play, stake sale and index inflows.
Pharma companies under BofA Securities India Ltd.'s coverage witnessed over 3% operating profit (Ebitda) estimates revision for fiscal 2025 and 2026, as results have been better than expected or in-line for the sector.
Earnings visibility in an uncertain global macro environment does benefit the sector, given positive near-term fundamentals like seasonality in India and US generics pricing, BofA said in a recent note.
A shift to defensive play by investors amid a broader market rally has also contributed to pharma's gain.
Factors Playing Up For Pharma Companies
Lupin Ltd., Zydus Lifesciences Ltd.: The companies have seen consensus earnings upgrade, BofA said. Their first-quarter profit beat analysts' estimates.
Cipla Ltd., Mankind Pharma Ltd.: Promoters of Cipla offloaded a 2.51% stake worth Rs 2,750 crore through block deals in May. Promoters in Mankind Pharma also divested shares worth Rs 1,365.5 crore in February, followed by stake sale by private equity firm ChrysCapital and Capital Group.
Alkem Laboratories Ltd., Mankind Pharma Ltd.: Institutional flows increased into Alkem Labs in anticipation of entry into MSCI indices, and Mankind's entry in them in May. Moreover, both are expected to benefit from seasonally strong near-term earnings, but risk of lagging margin performance is not factored into valuations.
Gland Pharma Ltd., Aurobindo Pharma Ltd. and Dr. Reddy's Laboratories Ltd.: The drugmakers have a visible core earnings growth over the medium-term.
On BofA's Radar
Dr. Reddy's Laboratories
The lack of near-term catalysts given lack of details on US order pipeline and large gRevlimid hole are concerns capping performance versus peers, BofA said. The company's transition to build more sustainable growth drivers like over-the-counter drugs and biosimilars outside the US market will be lower, but margin will remain intact.
Mankind Pharma
Despite earnings dilution from the Rs 13,630-crore acquisition of Bharat Serums and Vaccines Ltd., the stock has reversed decline over the last month given confidence in higher margins from the acquisition, BofA said. Risks remain to margin expansion due to higher competitive intensity.
Divi's Laboratories
A key pushback at current valuations is the risk of continued earnings downgrade from weak generics API pricing and competition. Higher volumes in existing projects, contribution from new generics and diabetes drug GLP-1's intermediate supplies highlight visibility on higher margins from the second half of this fiscal, BofA said.
