Pharma stocks see huge demand amid wider equity market volatility

BSE Healthcare index gains 5% in a month despite Sensex tumbling to record lows

USA-HEALTHCARE/CANADA Several pharma stocks ended sharply higher on Tuesday and continued the upsurge on Wednesday

The COVID-19 pandemic has had a huge impact across sectors as worries rise over the economic and financial fallout of the virus outbreak that has killed thousands globally. Over the last few weeks, there has been a heavy selling across most sectors. However, one sector that seems to have bucked the trend is pharmaceuticals. Even as the country is in a lockdown, pharma is one sector where analysts say demand remains strong and supply and logistics issues will be only temporary.

Over the past one month, the BSE Healthcare index has gained 5 per cent, compared with the 15.6 per cent decline in the BSE Sensex. Since March 23, the healthcare index has, in fact, surged close to 29 per cent.

Several pharma stocks ended sharply higher on Tuesday and continued the upsurge on Wednesday.  Morepen Laboratories and Vivimed Labs were up 20 per cent, Cadila Healthcare jumped 16 per cent, Alkem was up 13 per cent and Jubilant Life Sciences and Torrent Pharma gained 10 per cent. Even in the large caps, Sun Pharma and Cipla were up more than 6 per cent and Dr Reddy’s Laboratories rose 3.5 per cent.

Pharmaceuticals, of course, are part of essential commodities. But, it is not that the sector does not face challenges in the ongoing countrywide lockdown. Companies are facing lower employee attendance, including contract employees, some logistics challenges remain and field force has been impacted, too. Supplies of packaging and labeling material are also affected, which analysts say has led to lower capacity utilisations.

However, that will be offset by demand, which remains resilient and the rupee depreciation will aid earnings, too.

“We remain confident about the strong demand scenario from both domestic and export markets. Also, I believe that these disruptions would not be meaningful from a full-year earnings perspective as the benefits of weaker currency could bridge the gap,” said Cyndrella Carvalho, pharma analyst at Centrum Broking.

Consulting firm KPMG noted a spike in sales over the short-term as consumers stock up on essential medicines. Also, as developed countries stock up on essential medicines, there will be an increase in exports, too.

The US Food and Drugs Administration had made certain exemptions from import alerts for companies manufacturing critical drugs in the end of March, pointed KPMG. This is another positive for Indian drug makers.

“The pandemic has created a supply disruption from China and India could scale up its manufacturing to gain market share in the industry,” said Sriraam Rathi of ICICI Securities.

Pharma companies were impacted over FY2017-2018 due to a weak US generics drugs business and lower growth in the domestic business. Growth rebounded in FY2019 on a low base and companies are expected to end FY20 on a moderate profit growth, according to Axis Capital.

The broking firm expects pharma earnings to get a boost over FY2021-22 as the US generics business improves and domestic business will grow too.

On the one hand, growth outlook remains strong and the valuations too remain fairly reasonable.

“Most of the large corporates are trading at less than 2 times market cap/sales. The opportunities even from a pure domestic piece of the business are trading cheap,” said Carvalho of Centrum.

That is why investors may be rushing to buy pharma stocks at a time several other sectors are likely to see a deeper COVID-19-related impact.