Pharma Firms Better Placed To Endure Coronavirus Pain

The coronavirus outbreak has dealt a serious blow to the economy and most sectors are showing signs of stress. However, experts and brokerages feel that the pharma sector is better placed to navigate the crisis even though the challenges faced by it are all same.

The pharma and healthcare sectors have a crucial role in supporting the government and people and they are doing a great job by managing the key medicine supplies as demand remains strong being under the essential commodities segment.

However, brokerages say the 21-day lockdown has sprung up several unprecedented challenges such as lower employee attendance, logistic problems and accessory supplies like packaging, labelling material unavailability. These challenges have led to lower capacity utilisation at most plants.

Still, brokerages say the pharma sector is placed to gain at this juncture.

“We remain confident on the strong demand scenario from both domestic and export markets. Also, believe that these disruptions would not be meaningful from a full-year earnings perspective as the benefits of weaker currency could bridge the gap,” brokerage firm Centrum Broking said in a report.

Centrum says the export market will experience some price increases amid shortages and demand increase for generic drugs. However, it expects some impact on Q1FY21 Indian pharmaceutical market (IPM) growth.

“As we resume back to normalcy, the demand could come back faster than expected leading us to normalise growth for the year. We expect IPM at 9-11 percent. The WPI rate hovering at 1.75 percent in FY20 against 4.26 in FY19 could limit the price increases for drugs under the National List of Essential Medicines (NLEM). Nonetheless, non-NLEM price increases would continue to be at 10 percent which could be delayed owing to the lockdown,” Centrum said.

Centrum said it interacted with dealers across India to learn that everyone was managing through huge demand with lower employee availability and logistic issues.

“The sales in February and March month have been strongest. Leading companies are supporting distributors with extended credit period and some additional discounts,” Centrum said.

Brokerages do not see a meaningful adverse impact of the lockdown, which is in its second week, on the earnings of pharma players.

“With China resuming supplies of raw materials, potential disruption in manufacturing is now no longer a concern. There has been inflation in select raw material supplies but the same should only have a minor impact on gross margins during the quarter,” brokerage Nirmal Bang said.

“The India pharma market growth continues on expected lines – high single-digit. In the US, we could see marginal benefit coming from dollar appreciation and a potential increase in the stocking at the wholesaler level which should be offset by currency depreciation in emerging markets due to declining crude prices.”

The global turmoil has led to many striking value buying opportunities in the sector. The opportunity even from a pure domestic piece of the business is trading at cheap valuations.

Centrum Broking said it prefers Sun Pharma, Aurobindo Pharma and Dr. Reddy’s Laboratories among largecaps given the strength of the balance sheet and opportunity base. In the smallcap space, Centrum prefers FDC and Aarti Drugs.

The value unlocking in Biocon may still offer a good opportunity for investors, said Centrum. In domestic MNCs, Centrum prefers Abbott India and Pfizer India.-Money Control