Investors seek safety in a stable pharma amid recession fears

Mumbai: Pharma was often passed over by investors seeking multi-bagger returns when money was cheap and stocks were surging. But now the pocket, bracketed as a defensive play against the vagaries of global macros, is drawing its share of smart money on expectations that sales would climb - at least in high single digits - and cause margins to expand.

The Nifty Pharma index, which has underperformed in the past year, gained 1.05% in the past week when the Nifty and most other sectoral indices declined between 4% and 10%.

Pharma companies are likely to benefit from easing price erosion pressures in the US, monetisation opportunities in complex generics, and secular growth potential in branded formulations.

"The faltering economy, high valuations, and inflationary pressures have hurt the risk appetite of the stock market. Investors are looking for safety, and sectors like pharma that are defensive and have a reliable business outlook present a solid chance," said Vinod Nair, head of research at Geojit Financial Services. "Things are returning to normal for the pharma sector with a stable outlook, while rupee depreciation will provide a short-term advantage to some of them with good exposure to dollar revenues."

Foreign portfolio investors pumped in nearly ₹1,737 crore in pharmaceutical stocks during the first fortnight of September, the highest inflow after sectors such as financials, FMCG, and autos.

Stocks such as Divi's Laboratories, Ipca, Dr Reddy's, Cipla, and Alkem Laboratories have gained between 2% and 4% in the past week. The sector was in a consolidation phase in the past year due to a decline in business growth post-Covid, and valuations dropped about a fifth.

"Companies with large US exposure are trading at a discount, owing to growing pressure on prices and uncertainty around growth execution," said Vishal Manchanda, analyst, Systematix Shares and Stocks. "We believe there is light at the end of the tunnel, and US performance can only surprise on the upside."

His top picks are Sun Pharma, Cipla, Dr Reddy's, Ajanta Pharma, and Indoco.

"The pharma sector is more or less recession-free as the demand hardly depends on the recession," said Vishal Wagh, research head, Bonanza Portfolio.

Stocks such as Sun Pharma, Dr Reddy's, Torrent, Zydus Life, Laurus Labs, GSK Pharma, Ipca, and Pfizer may give returns between 12% and 30% in a year, as per Bloomberg consensus estimates.