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The Peculiar Performance of the Indian Pharmaceutical Industry

Updated: May 18, 2020

COVID-19 has been a huge negative influence on industries around the world. In a previous blog post, I outlined potential bullish stocks during this time; but, I had left out an entire industry that is booming during this time – the Indian pharmaceutical sector. Indian Pharmaceutical companies (Dr. Reddy’s Laboratories [NSE: DRREDDY], Aurobindo Pharma [NSE: AUROPHARMA], Lupin Pharma [NSE: LUPIN], and the like) have been reaching peaks during this lockdown, at a time when economies are coming to a complete standstill. Dr. Reddy, Cipla, and Sun Pharmaceutical Industries are currently all at their 52-week maximum – correlating with the performance of NIFTY Pharma, which was only performing at this level (now at ₹9377.00) as far back as in May 2019. To put things into a better perspective, NIFTY Pharma is drastically outperforming the NIFTY 50 itself, with a growth rate of 15% compared to the 3% rise in the benchmark index. This difference in growth shows the poor state of the Indian markets, as NIFTY had a growth that averaged around 8.6% through the fiscal years 2012-2019. 

This abnormal outperformance by NIFTY Pharma is quite unusual. Drug manufacturing factories are only operating at around 20%-30% capacity due to the lockdown, and the pharma supply chain has been in disarray. Transport isn’t allowed at usual capacity, with global air capacity for transporting drugs and medical devices down by 35% from last year, and complications arising through the absence of employees from the workplace. Furthermore, 70% of all raw materials and molecules are imported from China, and COVID-19 was set to disrupt all this. It’s astonishing as to how the pharma industry is outperforming the benchmark by this large a margin. 

The most straightforward explanation for this is through an investigation of the technicals (charts and moving averages) of each pharma company. The chart below is that of Aurobindo Pharma, and at the point where it starts growing, a bullish candlestick pattern (a bullish harami, to be more specific) is seen.  

Such bullish candlestick patterns are seen across all the stocks, as mentioned earlier, with these strong technicals being a driving force behind the investors’ confidence in pharma companies.

But through a deeper dive, a significant reason as to why there was such rapid growth in the pharmaceutical industry is because of the Indian government lifting trade preventions on the exports of 13 APIs (active pharmaceutical ingredients) and their formulations, thereby expanding the markets for most Indian pharma companies. China, Italy, and India have always been the largest exporters of APIs. Hence, with the virus striking the former two countries the hardest, investors’ confidence in Indian pharma is peaking. The government also lifted bans on HCQ, a cure to COVID-19 based on previous research. Indian pharma exported 2 million orders of HCQ to the United States recently as well, reflecting favourably upon the industry’s performance. However, recent articles from sources such as CNN and News18 have said that HCQ does more harm than good, and it is thus unclear whether it is still looked upon as a viable option to cure the virus. Although HCQ may not hold too much water anymore, it is important to note that the Indian rupee has been appreciating steadily throughout 2019, and its rate of appreciation grew with the advent of the lockdown due to the grim state of the US economy. Seeing the spread of coronavirus throughout the country, and a forecasted increase in the demand for HCQ, in tandem with the appreciation of the Indian rupee, the profits earned by Indian pharma companies are predicted to be higher through the coming quarters. To add to this, according to Anshuman Gupta of Investec Capital, “Globally, there is an increase in demand for medicines. People started stocking medicines before lockdown,” thus leading to an increase in the EPS of these pharma companies. Anand Tandon of Gryffin Advisors LLP states that “The stock market prices of pharma are going up largely because it has a) been an underperformer, b) it has been under-owned as a consequence,” hence leading to their current outperformance of the benchmark. Further, Indian trade with China resumed towards the end of March, and although it isn’t at its maximum capacity, it’s still instilling confidence amongst Indian investors. 

In conclusion, the extraordinary performance of Indian pharmaceutical companies is best explained through a myriad of factors that each managed to edge investors’ confidence higher and higher until the entirety of the industry drastically outperformed the Indian benchmark. It bears good news for investors solely interested in taking a long position, as there are many Indian pharma companies out there that broke past their price ceiling and are in a consistent state of increase like never before.  

Author : Alekhya Ravindra

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