Pharma stocks see 3rd straight month of gains in August, Mankind Pharma and 6 others rise up to 23%

Pharma stocks maintained their bullish momentum for the third consecutive month in August, with the Nifty Pharma index posting a gain of 6.61%. This follows strong performances in July, where the index rose by 10.37%, and in June, with a 5% increase.

Out of the 20 constituents of the index, 16 ended August in positive territory. Mankind Pharma led the gains, surging by 23%. Other notable performers included Glenmark Pharmaceuticals, Alkem Laboratories, Lupin, Granules India, Natco Pharma, and Aurobindo Pharma, all of which saw gains ranging from 10% to 20.5%.

This recent rally has driven the index to a 36% gain so far this year, marking its largest annual increase since 2020. Among the top performers, six stocks—Lupin, Zydus Life, Torrent Pharma, Biocon, Sun Pharma, and Aurobindo Pharma—have delivered gains ranging from 40% to 70% over the past eight months.

The continued rise in pharma stocks can be attributed to several key factors. As a defensive sector, pharma is less vulnerable to economic downturns, making it an attractive option for investors amid concerns about an economic slowdown.

Additionally, the sector benefited from a significant increase in sales and market share in the US generics market, along with robust sales of branded pharma products driven by growing demand for healthcare.

New product launches further bolstered the sector's performance, allowing companies to capture additional market share and boost sales. Moreover, strong quarterly earnings reported by many pharma companies provided further support to the sector's upward momentum.

Livemint has sought the views of experts to gain more insights into the rally in pharma stocks, with analysts outlining several important factors driving the sector's recent performance.

Vijay Chauhan, Co-Fund Manager at Right Horizons PMS, noted that the pharmaceutical sector has seen substantial revenue growth, driven by a robust domestic market, new product launches, enhanced gross margins through effective cost management, and expansion within the US business portfolio.

"Profitability is also on the rise, thanks to a better product mix and decreased raw material costs," he said.

"In India, growth has mainly been driven by price hikes and strong performance in chronic therapies, with most leading companies predicting high single-digit growth for FY25E. The US market is expected to maintain strong growth, fuelled by price stabilisation in existing products, ongoing increases in sales, and new product introductions," Chauhan added.

Anchal Khasal, Research Analyst at Green Portfolio PMS, highlighted the underperformance of pharma stocks over the last two years, pointing to two key factors. First, during the Covid period, companies accumulated inventory, expecting sustained demand. Second, in subsequent years, a drop in raw material prices impacted the value of this stockpiled inventory, contributing to the sector's underperformance.

As a result, companies were forced to clear inventory at lower values, which hurt their margins. "While the broader market rallied post-Covid, the Nifty Pharma index shrank, and by a significant margin," Khasal noted.

Now, Khasal pointed out that the index is finally showing signs of recovery. She emphasised that India, as one of the largest exporters of pharma drugs, is benefiting from strong US sales momentum. Additionally, the surge in product launches in the US market is further driving growth for Indian companies.

Can market confidence keep valuations elevated?

When asked about the sustainability of premium valuations given the consistent upward trajectory of these stocks since May, Vijay Chauhan stated that they maintain a 'neutral' stance on the sector. He pointed out that the Nifty Pharma index is currently trading at a 1-year forward PE ratio of 34.5x, which is above the average of 27.5x.

"This suggests that the sector is priced at the upper end of its valuation range. We favour specific hospital businesses that are expanding their bed capacity and consistently increasing their ARPOB. Market trends currently benefit companies that are introducing niche products in the US and those with a robust portfolio mix," he said.

Anchal Khasal remarked that Pharma's growth is driven by the strong fundamentals of these companies. "The momentum in the US has not only supported revenue growth but also margins. Valuations are likely to remain elevated as long as companies continue to achieve substantial figures from these new products," she said.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.