Tuesday, September 11, 2012


Key points
  • Pharma outperformed benchmark indices: Given the general preference for the defensives and the robust financial performance of the pharmaceutical (pharma) companies (partially aided by the benefits of the rupee’s depreciation), the pharma stocks have attracted a lot of attention from investors in the past few quarters. Consequently, on a one-year forward price-earnings ratio, the BSE Healthcare Index has outperformed the benchmark indices. The BSE Healthcare Index trades at a 53% premium to the Sensex which is much higher than the average premium of 39% the pharma benchmark index has enjoyed over the Sensex for the last five years.
  • Rally in pharma stocks sustainable: Notwithstanding the strong outperformance of the pharma stocks, the current valuations of the BSE Healthcare Index are at a 10-14% discount to its long-term (three-year and five-year) average multiples. Even within our coverage universe, the pharma stocks are trading at a premium of only 4-6% over their long-term average multiples. Thus, we believe that the outperformance of the pharma stocks is sustainable.
  • Divergence in valuations within pharma stocks: Though we maintain our positive stance on the pharma sector, but we believe that it is time to get selective. We suggest playing on the divergence in the valuations within the universe of the pharma stocks. Our analysis shows that a lot of positives are already priced in Lupin and Sun Pharmaceuticals, which are trading at a huge premium to their long-term average multiples. On the other hand, Cipla and Dr Reddy’s Laboratories are at a discount to their long-term average multiples and offer a better risk-reward ratio. Similarly, within the mid-cap space, we see valuation comfort in Torrent Pharmaceuticals and Cadila Healthcare.