Is India’s Pharma Rally Over? Macquarie Says Not Yet
Capsules on a production line at Lupin Pharma’s manufacturing unit (Photographer: Dhiraj Singh/Bloomberg)

Is India’s Pharma Rally Over? Macquarie Says Not Yet

The Nifty Pharma index is among the top sectoral gainers so far this year, when the pandemic caused the biggest equity selloff in more than a decade before the rebound wiped off losses. Yet, Macquarie doesn't see the pharma rally ending anytime soon.

The sector premium to the broader market is much lower than historic levels despite more than 40% gains for the index this year, the brokerage said in a note. Over the last decade, the Nifty Pharma index has traded at a 38% premium to Nifty 50. The premium, according to Macquarie, currently stands at 12%.

Is India’s Pharma Rally Over? Macquarie Says Not Yet

The brokerage expects continued sales growth momentum for drugmakers, led by improving U.S. and domestic sales along with strength in other key markets including Europe and Rest of the World.

For CRAMS/API [contract research-manufacturing and bulk drug] companies, we strongly believe that well-entrenched Indian companies are poised to benefit from increasing pharma outsourcing trends and de-risking of the API supply chain.
Macquarie In Its Research Note

Macquarie sees the earnings per share of large- and mid-cap formulations companies growing at an annualised rate of 22% and 25%, respectively, FY20-23E. The estimate for contract manufacturing and active pharma ingredients over FY20-23E is 26%.

What Can Go Wrong, According To Macquarie

  • Further supply/demand disruptions due to another Covid-19 wave.
  • Reversal in most of the cost savings seen in H1FY21.
  • Major policy changes in the U.S.
  • Stringent regulatory action.
  • Adverse forex movement.

Among large-cap pharma companies, Macquarie's top picks are:

  • Dr Reddy's Laboratories Ltd.—Outperform rating, 12-month price target of Rs 5,908, implying an upside potential of 25.7%.
  • Cipla Ltd.—Outperform rating with a price target of Rs 936, implying upside potential of 30.5%.
  • Divi's Laboratories Ltd.—Outperform rating and the target price of Rs 3,910, a potential upside of 19.8% over 12 months.

The brokerage's preferred bets in the broader market are:

  • Syngene —Outperform; price target of Rs 700 implies a potential upside of 30%.
  • Jubilant Life Sciences—Outperform; price target of Rs 975, suggesting a 12-month upside of 43%.
  • Solara Active Pharma—Outperform; price target of Rs 1,808, implying an upside potential of 84.6%.

The Nifty Pharma index ended with gains of 3.6% on Wednesday, its biggest single-day gain in two months. Nine out of the 10 index constituents ended with gains.

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