After a terrific bull run this year, pharma stocks have started showing signs of consolidating in the last couple of months. Experts say that things are looking optimistic in the case of pharma sector stocks from now on.
Investors who have been witnessing the rapid growth and demand for the Indian pharma sector, particularly during COVID-19, may have been eyeing high-performing Abbott India share prices and also the prices of shares for other entities in the industry. However, if you’re one of these investors, you would do well to restrain your gung-ho approach and do the fine print before investing.
Agreed, the S&P BSE Healthcare Index witnessed growth of close to 6 times in a period of 7 years as part of the earlier bull run in the 2009-16 period. This ensured a great compounded annual growth rate (CAGR) of close to 30% in a period of 7 years. Yet, the story turned around over a period of 4 years that followed thereafter with the index losing a whopping 1/3rd of its value in the absolute sense.
However, the reason why you should still check out is that the 11-year CAGR for the index is still at 14% which is highly respected by all standards. The pharma sector had previously performed below its potential owing to various factors including pricing based pressure in USA markets, stringent regulatory guidelines by the USFDA and delays in approvals for key drugs. However, after checking shares like Torrent Pharma share or shares of other leading companies, it can be said that Indian pharma companies have successfully maintained their decent position in the global industry. They are now recognized as market leaders for generic drug production worldwide and drugs produced here have already reached multiple economies including the EU, UK and USA among others. India has a cost advantage with drugs being produced at more affordable prices while helping lower ever-increasing healthcare budgets globally.
The present COVID-19 pandemic has greatly heightened the overall attractiveness of the pharma space. Demand has grown for several essential drugs as well. Pharma companies are however grappling with challenges owing to lower manpower abilities owing to the previous lockdown and transportation hassles while producing limited and vital drugs. In spite of these challenges, the Indian pharma sector continues to be one of the least affected industries at the time of the coronavirus pandemic and strong future demand for vital drugs will help growth for major companies involved in this sector.
Should you be betting on pharma stocks?
Take into account the attractiveness stocks such as for long term investments in spite of temporary volatility and you will find your answer. The ever-growing size of the industry and the healthcare industry at large will naturally help you earn good returns provided you invest at a suitable time. Being a rapidly evolving and innovating industry as well, major scientific and technological advancements will naturally aid substantial future growth for several Indian pharma companies. You should also consider pharma stocks which are majorly sound business entities with stronger balance sheets, higher resilience to market fluctuations, a time-tested and proven track record of USFDA clearance and expertise in terms of management. Companies should have growth visibility and the ability to come out unscathed from crises. Factors like lower debt to equity ratios, R&D expenditure allocation, high return ratios and various drug approval stages along with drug patents should be carefully ascertained for making pharma company investments.
The healthcare and pharma sector remained majorly in the revival stage even prior to COVID-19 across both domestic and USA markets and post the pandemic, there may be higher spending by the Government and private sectors alike for healthcare. There are challenges pertaining to the supply side of things although the overall industry outlook remains highly positive by all means. The recent pharma stock rally has already spurred the sector to somewhere slightly lower than its average 40% premium to the Nifty in the long haul earlier. However, this is not a peak valuation where premiums up to 135% were seen as common. If there is no further expansion in ratings, returns will be derived handsomely from growth in earnings.
Experts advise caution while picking stocks in spite of the overall bullish outlook for the pharma sector. You should ideally invest in pharma companies when the markets are down and these companies are more favorably placed than many other industries when it comes to tackling COVID-19. These stocks have also seen a rally of close to 20% over a very short period of time. You should look to stagger your pharma stock purchases over a period of 6-12 months on an average. In spite of the attractive correlation that exists between healthcare or pharma returns and the COVID-19 outbreak, deploying investments in sectoral funds is quite risky by all means. The fluctuations in the sector indicate that investors may sometimes be taken off guard as well.
However, if you are confident about the long-term prospects of the sector, then you should stagger investments and make sure that you do not end up investing more than 10% of the portfolio in these funds. Make a note of the fact that diversified equity funds should have weightage allocated for pharma stocks and sectoral fund allocation should be done, keeping this aspect firmly in mind. As a result, check out leading performers, consult your financial advisor and deploy your investments likewise. You should ensure that you have adequate diversification of your portfolio without exposing it overtly to the pharma sector itself owing to market volatility reasons. However, from the long-term perspective, investments in the pharma sector look increasingly favorable at the current juncture and several Indian companies should continue doing well globally.
