Pharma stocks: Medicine For Your Portfolio!!
The recent jump in prices of pharma stocks has prompted investors to have a fresh look at these stocks. Amir Shaikh explains why it is high time to look at pharma sector for investing
The pharma stocks, once a darling of the investors, have been disappointing investors in the last three years. The long-term investors who have shown conviction in the sector have been punished heavily as the prices of majority of pharma stocks showed no signs of recovery until recently. 
A majority of these investors hoped that the prices would bottom out and start showing uptrend again. Says Sandeep Kulkarni, “I have been holding on to select large-cap pharma stocks for morethan five years now. I am still holding on to them, hoping there will be recovery in the sector and the stock prices will reflect the same. It is difficult to predict the bottom prices; however, I feel we have seen the worst in pharma stocks”.
Indeed, the performance of the pharma stocks in the last one month have enthused investors, both retail and institutional. After a long gap, we are seeing institutional investors betting on the sector and launching funds dedicated to the sector. The cheaper valuations in relative terms and the growth prospects for the industry are the two most important reasons.
The industry faced problems recently due to the increasing competition and several of the pharma companies witnessed stretched balance sheets, which affected the stock prices negatively. The net profit of the pharma companies was also down on account of the one-time tax adjustment related to changes in the US tax rates and the continued pricing pressure in the US business.
Going ahead, the pharma stocks, at least the large-cap ones if not the entire lot, may see some outperformance owing to the regulatory resolutions that have happened on the ground and also the likely regulatory resolutions in future. The industry may face moderate price erosion going ahead and several product launches across generic and specialty categories, which augurs well for the sector in the second half of FY19.
India has established itself as a hub for global manufacturing and research in the pharmaceutical space. Indian pharma industry is one of the biggest in the world and has the second largest number of US FDA approved manufacturing plants outside of the US. There are almost 2633 FDA-approved drug products and India contributes nearly 10 per cent of the world production volume.”
Pharma Stocks Performance
We find that the pharma companies with larger market capitalisation have done better than those with smaller market capitalisation. Our data suggest that there are 37 pharma companies with market cap greater than Rs 1000 crore and the average performance of this set of stocks.
Manav Chopra
CMT, Head of Research – Equity, Indiabulls Ventures Ltd.
Nifty Pharma Index Likely To Outperform And Hints At Limited Downside
NIFTYPHARMA Monthly Charts
The Nifty Pharma index has declined by over 40% from its recent all-time highs and has been in a downtrend since 2015. The recent candlestick formation in May ’18 observed a last engulfing pattern, which usually occurs near the lows of a downward trend and indicates extreme bearish sentiment, which is now being confirmed by the emergence of the bullish engulfing and indicates a possible bottom in the making. The index since last three months has observed multiple bullish reversal patterns on a smaller time frame charts and is currently forming a probable bullish engulfing pattern, which will be confirmed on a monthly close above the 9115. The momentum indicator RSI on the lower panel has confirmed a bullish breakout from the positive divergence pattern and has formed a higher high, which hints for a trend reversal in the near future. The multiple bullish reversal candlestick patterns, along with the positive divergence in the RSI, indicates strong support clusters around the 9050-8950 levels, and one can maintain a positive bias as along as these levels are held. The falling trendline drawn from the recent peak is on a verge of an upward breakout, which will be confirmed on a decisive close above the 9650 levels. Recently, the prices are also in a channel formation since May ’17 and have resistance around the 9660-9680 levels, along with 23.2% retracement. There are candlestick evidences which hint for a strong support, but the trend reversal confirmation is awaited once prices exceed the 9680 levels, which is the confluence resistance zone and will open the window for a rally towards the 11,000 level, which is the 50% of the retracement level of the recent fall.
The upper panel of the chart is the RSC (Relative Strength Comparative) which compares the performance of one security with another with a ratio chart. The Price Relative indicator is simply the base security, divided by the comparative security. The chart shows the NiftyPharma/Nifty50.
The rising ratio means the underlying base security Nifty Pharma index is outperforming its benchmark Nifty 50. The Nifty Pharma, after a series of underperformance, has shown some hints of a trend reversal in the past few weeks. The RSC ratio has, after a series of declines, formed multiple bullish divergences which are confirmed by the RSI indicator. The RSI has given a bullish breakout from its consolidation pattern and hints for further strength to the RSC ratio. The RSC ratio has closed decisively above the mid-Bollinger band after December ’16, which is a positive signal and indicates outperformance by the Nifty Pharma index in the near future.
Nifty Pharma performance (%) is better than the performance of pharma companies with market capitalisation of less than Rs 1000 crore. The average one-year return for pharma companies with market capitalisation greater than Rs 1000 crore is 1.06 per cent, while the one-year return for companies with market capitalisation less than Rs 100 crore is negative 8.98 per cent. If we consider a period of five years, we observe that pharma stocks with larger market capitalisation perform better than
the one with market capitalisation less than Rs 1000 crore.
"Healthcare has become one of India's largest growing sectors, both in terms of revenue and employment. The Indian healthcare industry stood at Rs 4 trillion in 2017 and is expected to increase at a compounded annual growth rate (CAGR) of 16-17 per cent to reach Rs 8.6 trillion (US$ 132.84 billion) by 2023. It is expected to witness a tenfold spurt in value terms driven by growing incidence of lifestyle diseases and rising demand for affordable healthcare delivery systems".
-Soumen Chatterjee
Director, Guiness Securities
Technical View On Pharma Stocks
Nifty Pharma index has been trading in a downward sloping channel pattern, denoting lower tops and lower bottoms on a weekly time frame, immediately after hitting an all-time high in April 2015. However, since November 2017, though the sector is trading within the channel, the prices have been reversing from the bottoms without hitting the channel line (lower line). Further, the sectoral index formed a hammer in the week ended May 25, 2018, with which the prices have surged, depicting provisional bottom fishing in the sector. The reversal is also supported by rising volumes and positive divergence between the prices and oscillators. For now, the index is trailing at the main trendline and is heading its 100 and 200 period EMA levels on the weekly time frame.
Conclusion: -
Looking at the relative cheaper valuations and the improving prospects of the industry, aided by institutional buying in the pharma stocks, it makes sense to remain invested in the pharma sector in India. For those who have no exposure to the pharma sector in their portfolios, it is high time to take some amount of exposure in the sector. While choosing pharma companies for the portfolio, adequate care should be taken to avoid investing in pharma stocks that have stretched balance sheets. There are still many pharma companies that are leveraged more than is required, which is affecting the growth prospects of these companies. Also, it is prudent to stick with only quality pharma stocks with proven track record. You can expect quality in pharma sector from the large-caps, and hence, one should consider investing in large-cap pharma stocks and avoid investing in small-cap and mid-cap pharma stocks. Another way of investing in pharma sector is parking a predefined amount in one of the sectoral funds that invest predominantly in the pharma sector and other related sectors.