Pharma index outperforms Nifty with 16% gains in FY24

After multiple quarters of lacklustre returns, the listed Indian pharma space has come back to life with the Nifty Pharma index gaining 16% in the current financial year, outperforming Nifty’s 11.6% returns.

The recent rally has been driven by hospitals and emerging green shoots in pharmaceutical exports, particularly to the US, along with continued momentum in domestic branded formulations, according to experts.

Stocks gaining the most during this period include Lupin (45.2%), Aurobindo Pharma (41.3%) and Torrent Pharma (25.2%).

Pharma funds have given average category returns of 15% in the past three months in absolute terms, according to Value Research, beating infrastructure, banking and technology sector funds and all other thematic funds.

Analysts expect pharma companies to report moderate growth in sales and sharp margin expansion in the first quarter of this financial year aided by improved US generics pricing and strength across most branded markets amid gradual easing of cost pressures.

“Pharma companies under our coverage are likely to report revenue, Ebitda and PAT growth of 15%, 33% and 28% y-o-y in Q1FY24E. The growth is likely to be led by new launches, market share expansion in key products and acquisition in US and India. Aggregate gross margin to improve marginally q-o-q at 64.8% as higher raw material cost and mandated price cut in India may offset the benefit of better margins from niche US launches,” stated a recent note by ICICI Securities.

During FY22-23, the US generic pharma market witnessed unprecedented levels of price erosion in the wake of consolidation in buyer channels and decline in shortage opportunities.

“While over the last few months, the volume dynamics have remained unaltered, pricing pressures have begun to moderate. Despite a partial improvement in the trade terms over last year, generic pharma exports remain a commoditised space,” a report by DAM Capital observed.

The brokerage believes that cost competitiveness is the key to survive and thrive in the business, and companies need to be willing to operate in high volume manufacturing model with a reasonable profitability. Generic players with a broad portfolio and significant vertical integration will be winners over the medium-to-long term, it said.

The brokerage further added that the complex generics space has failed to deliver in terms of revenues and profitability. This, coupled with the requirement of higher R&D spending for development of complex products, has led to a disappointing return on investment. On the other hand, the branded formulations space remains a high margin/ROCE and a sticky business with superior pricing power.