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Investors back Indian pharma growth story

NetScribes/Rakesh Kedia

The biggest gainer from the recent meltdown in infotech stocks has been the pharma sector. Given the sustained volatility in the tech stocks, market players are now looking at pharma stocks as the next best option. The shift is more pronounced in case of domestic pharma majors, which have outperformed those of multinational pharma companies in the three weeks beginning October 3.

The Tata Life Sciences & Technology Fund has increased its exposure to the pharma sector by 10 per cent to 35 per cent in the current month. Simultaneously, it has reduced its exposure to infotech stocks from 60 per cent to 50 per cent, says Aspi T Contractor, chief investment officer, Tata Mutual Fund.

Kotak Mahindra Mutual Fund's K-30 Fund has also increased its exposure to pharma stocks. "Last month the exposure was at around 13-14 per cent, now it is at 16 per cent," says Ranjit Kalmadi, vice-president at KMMF. The fund recently bought into Cipla when the scrip crashed by Rs 200 in a week following news of income tax raids on the company.

Dealers say that foreign institutional investors (FIIs) are showing a marked preference for domestic pharma stocks, especially Ranbaxy, Sun Pharma, Cipla and Dr Reddy's. "Around 12-15 per cent of funds from liquidated securities finds its way into pharma stocks," says Rajiv Choksey of KR Choksey Shares & Securities Pvt Ltd.

Between October 3 and October 26, the prices of key Indian pharma scrips were on the rise even as the Sensex fell 10 per cent. The Dr Reddy's scrip rose from Rs 1,259.5 on October 3 to Rs 1,418.70 on October 26. During the same period, Ranbaxy rose from Rs 624.40 to Rs 713, Sun Pharma from Rs 417.05 to Rs 509.20 and Cipla from Rs 716.70 to Rs 899.

One reason for the renewed interest in pharma stocks is that increased focus on research and development has changed investor perception of Indian pharma firms. Ranbaxy, for example, spends as much as 5 per cent of its revenues on R&D. Besides, the R&D efforts are beginning to pay off. Nicholas Piramal recently developed a drug to prevent malarial relapse, the patent for which has been filed with 140 countries.

According to a dealer at Parag Parikh Securities, another reason why pharma scrips are coming back into favour is that they have been underperforming the market over the past few months and are now available at bargain rates.

Marketmen feel that with their increased focus on exports and R&D, Indian pharma companies may report around 40 per cent growth in their earnings. Although this may not look impressive enough in comparison with the 100 per cent and above growth that the software sector reports, what matters is that this sort of a growth is seen as being more sustainable over a period of three to five years.

With the old economy stocks continuing to be plagued by problems of slowdown in the economy and the recent hike in oil prices, pharma stocks have plenty in their favour. Besides being a knowledge-based sector like infotech, the pharma sector has the added advantage of low manufacturing costs.

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