Pharma is a defensive sector
The Sensex has reached the 17,000 mark. What does it mean
for Indian Pharma? Nandini Patwardhan speaks to Aditi Kare Panandikar,
Director-Business Development, Indoco Remedies, given that the stock was oscillating
in the Rs 200-400 band
does the sensex's movement impact pharma companies?
Pharma companies, being a part of the Sensex, are not immune to market volatility.
With the rise and fall of the overall market, these stocks tend to move in tandem.
While many experts are of the opinion that pharma is a defensive sector (i.e.
the pharma industry's prospects theoretically would be unaffected by stock market
volatility), the opinion is still divided. However, the broad investor sentiment
prevailing towards pharma seems to be skewed towards CRAMS (like Divis Lab,
Ankur Drugs, Jubilant Organosys, etc) and selective generic players (Sun Pharma,
What are the factors that influence the rise in stock prices
of any company?
There are innumerable factors behind the fluctuations in
the share prices of any company. These factors are both, external and internal.
On external factors the company does not have much control. Such factors include
government policies, international trade policies of other countries, any changes
in tax laws, political scenario, etc. Internal factors can be attributed to
business strategy, accounting policies, customer concentration, geographical
concentration, financial risks like exchange rate fluctuation, increase in input
costs, marketing licensing agreements etc. For instance, typically an acquisition,
an ANDA approval, out-licensing a new chemical entity, etc can drive up the
stock price of a pharma company in the short run.
But what matters most for investors (especially for those with a long-term investment
objective) would be the prospects of the business the company is into, the quality
of the management and so on. For instance, say oncology is a specialized segment
globally, in which there are not too many dedicated players. With the incidence
of cancer on the rise and many patent expiries for oncology drugs lined up in
the next three to five years, a company like Dabur Pharma (largest API player
in oncology from India) may be sought after.
What strategies can companies adopt to avoid this fall
There cannot be a clear cut strategy to avoid a fall in the stock price. This
depends on the investor sentiment towards the company and the relative attractiveness
of the stock with respect to valuations, etc. Many companies with sound business
models have rewarded existing investors in bad times by either allotting additional
shares (bonus or rights issue) and increasing or maintaining the consistency
in declaring dividend.
What can be the reasons for the sensex crossing the 17,000
The recent rally in the stock market is largely due to the US Federal Reserve
(Fed) cut in interest rates. The Fed has cut interest rates to 4.75 percent
from 5.25 percent (a cut of 50 basis points) on fears of an impending US economic
recession. The excess liquidity (in terms of money) created because of this
cut has flown into emerging stock markets like India. There is a lot of optimism
due to the fact that India seems to be a favourite destination of international
investors post sub-prime issue. Broadly, the upswing in the markets have been
mostly driven by increasing inflows from FIIs who are convinced about the growth
prospects of the Indian economy and that of the equity markets in terms of generating
decent returns in the medium to long term.
What does it mean for the economy in general and pharma
space in particular?
To run you through the positives in India, sample theseinflation is at
a three-year low, high GDP growth continues at nine percent, robust advance
tax numbers indicating good profits, Indian companies largely unaffected by
the global sub-prime issue and interest rates are stable and may even decline.
Among the perceived negatives are political uncertainty and an appreciating
rupee. All these inputs throw up a cocktail of a strong and robust economy indicating
that the markets do have the potential to go up further from these levels. This
is a corroboration of the fact that people still find quality companies to invest
in. Pharma, on the other hand, has been overall an underperformer in this boom,
though select shares have done well.
cannot be a clear cut strategy to avoid a fall in the stock price. This
depends on the investor sentiment towards the company and
the relative attractiveness of the stock with respect to valuations, etc"
- Aditi Kare Panandikar
Is the strong Rupee related to the sensex boom?
Whenever currency of a country moves up, it's usually implicit
that the economy of country is doing well. There is a huge FII inflow in the
country because of booming financial market, RBI allowing External Commercial
Borrowings (ECBs) till $ 2 billion and FDI increase in various sectors led to
oversupply in Indian forex market. Also the crisis in US mortgage sector has
raised concern over working of US economy. Thus Ben Bernanke, Chairman, US Federal
Reserve, has raised the concern of a slowdown in the US, which led to a depreciating
US dollar. Au contraire, the Rupee has depreciated against Euro and GBP, so
it won't be prudent to say that the rise in rupee is purely based on growth
in economy; it is also because of short term recession in US.
The rising rupee will help the government to curb inflation, as the input cost
of crude and electronic items will be lowered which will help in fighting the
ongoing inflation and hence the interest rates. One of the biggest beneficiaries
of rising Rupee would be those who have borrowed from international banks.
Rupee appreciation (or a stronger Rupee) is negative for Indian companies that
are net exporters and have a billing in US dollars (IT, pharma, commodity companies,
auto, etc). (Almost 76 percent of India's exports are to the US) This undermines
export competitiveness of India.
What are your recommendations for pharma companies to make
the most in the boom time?
Unforeseen pricing pressure of generics abroad has been a
key reason for the continued underperformance of the pharma sector in general.
But within the pharma space there are still niche plays (in terms of strength
of the business model, prospects going forward, valuations, liquidity in the
stock, etc) wherein investors can have a second look based on their risk appetite.
For instance, if one is looking at a consistent, steady state return with a
relatively low risk model then possibly one should look into a company like
When the fundamentals are right, we have all
the reason to cheer. Manoj Garg, Research Analyst, Emkay Shares
and Stock Brokers chats with Nandini Patwardhan on the Sensex boom.
What is your view
of the stock markets?
The market is overall bullish
and companies who are likely to do well, are definitely going to get an
advantage out of it. This is because, ultimately the stock market movement
depends on the earning growth of the companies and the business prospects
of the companies. So if the stock market is going up, there are all chances
that pharma stock will also move up provided that the earnings are intact
and the fundamentals are strong.
What are the factors that
influence the rise and fall in stock prices of a pharma company?
Again, there are two things
that make a difference-the performance of the company and the perception
of the people about the company. If the people are positive about the
earning potential of the company, quite obviously, they will give a better
valuation to the company.
What about the case of
We have a lot of FIIs that
invest in the country. According to recent data, the FII investment is
around Rs 40,000 crore, which is through mutual funds and insurance companies,
their investment is in the range of 10-14K crores. So if any FII takes
out its investment from the Indian economy, it will have a negative impact.
But because our economy is surging, we tend to be a little immune from
whatever is happening in the global markets. However, since money flows
very fast, so any impact right now in the US or Asian markets will have
an impact in Indian markets
Does this Sensex boom
remind you of the Harshad Mehta times?
If you compare this with
the Harshad Mehta times, you can observe that the growth that is happening
today, is on the basis of fundamentals. It is not because of the boom,
where someone is artificially trying to manipulate the markets. If one
observes the GDP growth in the last four years, one may find that India
has been consistently growing at 8-9 percent and going forward, people
will expect the same rate to be maintained.
Today if you see the multiple
of China, it is somewhere in the range of 40-49, because many people think
China is going to grow much faster. In India, we have a multiple of 20-21.
So as long as the fundamentals are strong and the growth is positive,
I don't think we should be concerned about the 17,000 or 20,000 mark.
When the fundamentals are right, we have all the reason to cheer.
What about the sudden
surge in last few days?
That means it is not built
up artificially, it is based on fundamentals and the sudden rise that
has happened, is probably because the US has cut the Fed rate by almost
50 basis points, that means the money in the US markets will probably
flow in the emerging economies. Then there would be more investment in
emerging markets and if you see the sectors in emerging markets, which
are domestic oriented, as against US where there can be a short term recession.
There are three to four sectors that have done well. One is realty, the
second is banking, third is oil and explorations. And when those sectors
are doing well and when there will be easy money, people will expect the
interest rate in India to come down. Hence, the local sectors, which have
more presence in domestic industries are performing well. And this is
likely to continue as fundamentals are intact.
What is the future of
It all depends on the business
model of the company. If you see the early 2000, it was the era of absolutely
integrated companies which has some backward to forward integration like
Sun Pharma, Ranbaxy, Dr Reddys Laboratories (DRL), Cipla. This era of
2006, will be the era of companies into the contract research space. There
is Dishman and Nicholas Piramal India limited (NPIL). Going forward, companies
who will build their capability in R&D are going to be in an advantaged
stage. But I think companies like Glenmark, Sun Pharma, NPIL, DRL, etc
are really building their capabilities.