More pain left in richly valued pharma stocks despite 15% plunge

MUMBAI: Once considered to be safe bet in a volatile market, pharmaceutical stocks are among the top losers in the on-going market correction. The CNX Pharma index has plunged nearly 15 per cent in the month of April and looking at the onslaught, it will take some time for investors to gain confidence back in the sector.

The rich valuations of pharma stocks, US regulatory hurdles related to Indian plants and concerns of new USFDA approvals for generic drugs are the major factors to derail the rally in pharma stocks. Such has been the bearish mood in the space that even the fall in rupee against the dollar is not exciting large players.

"We note that one year forward P/E of pharma sector (30x) is nearing FMCG (31x). However, we believe it should continue to trade at discount to FMCG given its (1) higher regulatory risks and (2) lower RoE/ RoCE given lower proportion of branded business," said Axis Capital report.

According to the brokerage, while large Indian pharma companies have scaled up their R&D and M&A in order to increase their capability in complex generics, monetization would be visible only from FY18.

After a sharp spike of 18 per cent in last three months, selling pressure was on expected lines in the pharma sector. As the stocks correct further, they will start looking reasonable for long term investors.

"There is a huge amount of short built up on pharma counters. Even if there is a pullback of say 3-4 per cent, it should be seen as an opportunity to exit long positions. In case, if an investor is aggressively building up positions, then definitely he/she could look for any pullback in these stocks to the tune of 3-4 per cent, before making fresh shorts," said Ashish Chaturmohta, Head Technical & Derivatives Desk Research, Fortune Equity Brokers.

"So overall, the trend looks quite weak. The kind of built up that these counters have, suggest that there can be another 5-7 per cent downside from current levels," he added.

Market expert Ajay Bagga is of the view that long term investors should start looking at pharma names. Even from a short-term point of view, they may serve as a natural hedge against the US Fed move later in the year.

"The sector will keep on growing. If you even look at global players, the kind of numbers that are coming through from the US and the Europe are quite encouraging. A lot of M&A activity is also happening which will generate more value for shareholders. We enjoy a natural advantage in the pharma sector," he told ET Now.

"Even as we have seen some institutional investors pulling out money from pharma counters, I would suggest investors to own pharma stocks from a multi-year perspective," he added.