Pharma stocks to buy: Beaten-down pharma stocks turn healthy bets for investors


ET Intelligence Group: India’s emergence as the biggest supplier of hydroxychloroquine to the US drug market for treating Covid-19 has triggered investor interest in Indian pharma stocks.

The once battered sector saw a relief rally last week, with shares gaining between 15% and 30% with some reaching their 52-week highs or inching to that level. Cipla and Cadila Healthcare were the top gainers while Strides Pharma, Ajanta Pharma and Bliss GVS Pharma gained the least.

The swing in investor sentiment ahead of any change in fundamentals or performance numbers may be surprising, but is justifiable — pharma stocks were oversold and were due for a re-rating.

They had peaked in 2015, with their fortunes taking a gradual beating on the back of a spate of regulatory actions, followed by governance issues and pricing pressure in key markets. The demand for some drugs because of the Covid-19 crisis gave the Street a reason to turn bullish on the sector.

In the backdrop of the extended lockdown, which has caused consumer demand to plunge and is hurting growth projections in several sectors, pharma is among the few sectors that are still providing visibility and hope of growth.

Pharma snip 1

The sector has managed to function during the lockdown and meet local and global demand. Latest data from industry body PharmaTrac shows that apart from an overall seven weeks’ inventory at the distributor level, the inventory at pharma company depots is of 4-6 weeks, and an average 7-8 days’ inventory at the retail level, leading to a cumulative medicine stock of 13 weeks, or almost three months.

With China resuming production of bulk drugs, the supply-chain woes of Indian pharma companies are likely to ease out soon. While the number of analysts turning bullish on pharma stocks has increased, shares are trading near their target prices.

5 pharma stocks that can potentially safeguard your portfolio

Safe Bets

11 Apr, 2020

The novel coronavirus pandemic has caused severe supply-side disruptions in various sectors and earnings will be cut by 10-15%. Pharma as a sector has emerged as a strong contender to drive the next leg of the rally, whenever it comes. In anticipation, pharma stocks have seen a huge run-up in the last 10 days. This is not just true for India, but globally too pharma companies has performed well. While in the short term, most companies will bounce back from the last 5 year of underperformance, this time around, the leader will be different. Hence, you need to choose your stocks carefully. The following are the strong tactical buys with strong catalysts. (Source: Edelweiss Securities)

This shows that after the initial exuberance — in which all pharma stocks rallied — the rally could sustain for companies with good fundamentals and fair valuations. Those with business uncertainties, regulatory clampdowns, governance issues and litigation risk may fall out of favour, despite the positive sentiment. Stocks of Dr Reddy’s, Cipla, Abbott India, Laurus Labs and Ipca look promising on a longer-term basis.


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