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16-31 October 2007  
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Home - Management - Article

‘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

How 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, etc).

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 in prices?

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 mark?

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 these—inflation 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.

"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"

- Aditi Kare Panandikar
Director-Business Development
Indoco Remedies

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 Indoco.

‘Fundamentals are intact’

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 linked economies?

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 pharma industry?

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.




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