Pharma Stocks Holding On To Valuation But Do They Promise Wealth Ahead?

The market has seen a change in sentiment in the last few weeks. In the last 30 days of trading, the Sensex has come down from levels of 20000 to 18900. Macroeconomic issues, international as well as domestic have been haunting the markets. In such turbulent times, investors usually look for shelter in defensive sectors. The pharmaceutical sector, one of the two famous defensive sectors has maintained a positive streak. The BSE Healthcare index has gained by 0.5% during this period, indicating investors are holding on the pharma stocks.

The domestic pharma sector is going through a rough phase due to the uncertainty over the pharma pricing policy. In the exports markets, particularly in US generics, the sector has maintained robust growth. Q3 results were in line with expectations, indicating that the best in pharma is not yet over. Research reports of leading brokerage houses too have maintained a bullish stance on the sector.

With the fall in the markets a few pharma stocks make for a good bargain. Cadila, Dr. Reddy's Labs, Cipla, Biocon and Torrent Pharma have come off the valuations they traded at a month ago. Shares of Wockhardt have also come off their all-time-high valuation. Sun Pharma, which is included in our large cap coverage, has shown robust growth. So what should one do with leading pharma stocks?

Sun Pharma – The stock is trading at a TTM PE multiple of 31x and seems a bit overvalued at the moment. Investors are however very bullish on the stock due to the high earnings momentum it has seen and hence the stock should be in the portfolio. In fact this is one stock that is a true value creator.

Cipla – The company is in process of acquiring Cipla-Medro in South Africa. It has seen some fall in valuations and is trading at a PE of 20.5x. We advice to hold the stock at the moment as there is not much upside margin in the stock.

Dr. Reddy's Labs – The stock has not got the valuation that it deserves. In the last quarter due to a high base effect, revenues were below expectations. We think there is an upside of 10-12% in the stock.

Lupin – The stock remains overpriced compared to its peers due to high earnings expectations. The next quarter will give more clarity on if the momentum is continued. We thus advice no fresh exposure in this stock at the moment.

Wockhardt – It remains massively undervalued at the moment and without any doubt we would recommend investors to enter the stock and expect an upside of more than 25% in the next six months.

Ranbaxy – The stock has seen buying momentum on the anticipation of the launch of its new first-to-file drug. There are a few ‘buy’ recommendations on the stock with a target of over Rs 500 per share. We believe that the stock has the potential to move up by about 5-6% at current levels. Hence we advice investors to buy the stock if it falls to a level of Rs 425 per share.

Cadila Healthcare– Due to lower earnings in the last quarter, the stock is seeing some selling pressure. However in the long term, we remain bullish on the stock. With an investment horizon of two years, this stock seems like a good bargain.

Glenmark Pharma– The stock looks like a good buy at the CMP. From current levels, a 12% upside in the scrip is easily achievable.

IPCA Labs – The stock looks overvalued at a PE of 20x and we advice no fresh exposure in it.

Torrent Pharma – It has seen a fall in valuations but we believe that one should avoid this stock since an earnings trigger is not as high as seen in the other stocks.

Biocon – The stock remains undervalued but has not been able to catch the fancy of investors due to a complicated business model. The advice to investors would be to hold the stock and not add any fresh exposure.