Long-time favourites of Dalal Street, pharma stocks have underperformed equity benchmarks so far 2016 – the first time in seven years. Shares of Sun Pharmaceuticals, India’s most valuable pharma company, which was an outperformer for the last six years, have lost over 6% in value this year as compared to a close to nine percent rally in Nifty50. This, notwithstanding it reporting better-than expected net profits for the quarter ended June 2016. The drug maker posted over three fold jump in net profit to R2,034 crore during the quarter.
The case is no different for Lupin. After outperforming the benchmark index for eight years in a row, the pharma giant’s shares have gone out of favour with investors this year as it lost over 17%. Though the June quarter top-line for Lupin came in below analysts’ estimate the healthcare major has managed to post better than expected profit for the last three quarters.
Analysts at Jefferies believe there are multiple reasons for such under performance. “Indian pharma industry is seeing multiple headwinds in both US and Indian markets. We are most concerned about the rising pricing pressure and its impact on the concentrated portfolio. Additionally, we believe that regulatory challenges are here to stay and will lead to higher operational costs. Despite significant earnings cuts, growth expectations are still elevated and so are valuations. We expect earnings to see 10% downgrade over the next 15 months.” they observed in a recent report.
According to them, shares of Sun Pharma and Lupin are more at risk to such downgrades than their smaller peers.
No wonder the investors of these two firms have lost most in terms of market value this year among the Nifty constituents, barring telecom player Idea cellular. While the market cap of Lupin narrowed by R14,213 crore, Sun pharma itnessed falling its market value by R11653 crore to R1.86 lakh crore.
The Nifty pharma index which tracks ten pharma firms lost 3.6% so far in the calendar year against the last year gain of 9.3%. The gauge for the pharma firms is currently trading at 23.9 times of its twelve months forward earnings against 16.5 times for the Nifty 50.