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Time right to pick up pharma stocks

This article was posted on Jul 22, 2009 and is filed under Stock Views

MUMBAI: In times of volatile market conditions, select pharmaceutical stocks are seen as good investment bets, with analysts seeing 20-25 CAGR
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in 12-15 months.

Analysts are looking at companies into Contract Research & Manufacturing Services (CRAMS) and makers of generic drugs. Stocks falling in the former category are preferred over the latter, due to recent concerns raised by the US FDA.

The share price of Sun Pharmaceutical tanked by 12 per cent after US authorities stopped production at its US subsidiary, Caraco Pharmaceuticals, for violation of current good manufacturing practices (cGMP). In 2008, the FDA also banned 29 Ranbaxy drugs for manufacturing problems at two of its plants while holding the company responsible for manipulating the data submitted to the regulator.

Analysts feel the overall outlook for the sector is now positive. Effective measures have been taken by pharma companies to check foreign exchange losses due to depreciating rupee. Further, valuations are quite attractive after sharp corrections. The September quarter results are expected to be much better.

The outlook and valuations for the sector are good, with some company specific risks. However, US FDA concerns continue to weigh on the sector. In the domestic and emerging markets, growth continues though somewhat subdued due to restructuring sales forces or cautious approach to avoid riskier sales, mentions a study report by ING Investment Management.

Said Madhumita Ghosh, vice president, Research & PMS, Unicon Investment Solutions, “Pharmaceutical sector is currently trading at PE of 21x. Going forward, companies would encourage employment generation. Companies which are in joint venture with foreign counterparts will recruit cheap but quality staff from India to boost product marketing.”

Sarabjit Kour Nangra, vice president-research, Angel Broking, said, “There is no downside risk involved in the sector unless market heavily corrects, which is unlikely. In a turbulent time, an investor can allocate 15% of his total equity investment to pharma sector stocks.”

In the CRAMS segment, analysts recommend Jubilant Organosys, Cadila and Piramal Healthcare, wherein they foresee huge future opportunities. In generic drug segment, there are some stocks with good potential viz Lupin, Sun Pharma and Cipla.

Jubilant Organosys was in high debt but it got discounted by its recent acquisition of a Canadian firm called Draxis Speciality Pharmaceuticals Inc. for $253 million using a combination of proceeds from a previous FCCB issue and debt amounting to $160 million. Similarly, Lupin is trading at an attractive PE of 18x. Despite all odds, Sun Pharma has highest domestic margin of 70 per cent and zero debt on balance sheet.

Market will remain in consolidation mode over the next 3-4 months. Before the growth ride begins, it is right time to take exposure to select pharma stocks to reap the benefit of the next bull run, feels Angel’s Nangra.


source: Economictimes

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