Defensive bet with macro tailwinds? 5 Indian pharma stocks with upside potential of up to 20%

Just before the whole market was consumed by the PSU rally, one sector that came into the limelight after many years of underperformance was the Indian pharma companies, yes they are very different in every sense from MNC pharma. During the PSU rally, these pharma stocks have been consolidating, however, in the last few days, some of them have once again started reacting to positive developments in the individual company indicating that there is money on the sideline that is ready to come into these stocks. Sectors like pharma which have seen a very long phase of business remodelling and valuation readjustment need to be brought back on the watch list. It might be too early to call, but if a re-rating gets momentum once again then they might be better candidates for volatile markets.

Pharma as a sector has been under pressure for a very long time. However, some of the small and mid sized Indian pharma companies which are not hit by pricing pressure of the US generic market and other issues which large pharma companies have been facing keep attracting interest from the analyst. The list is based on upside estimated by the analysts, with the highest potential stock coming on the top of the list.

In the last two years, every sector has come into focus at one point of time or the other. Some came into limelight due to the fact of real positive changes in the fundamental operating matrix of that sector. While others came into focus just because of too much liquidity chasing Indian paper. In the case of the pharma sector, after years of consolidation, valuation readjustment and regulatory learning which altogether led to positive change in the fundamentals, the stocks made a comeback. It is almost a period of six to eight years that the industry is back on the list where there are more positive developments than negative. These changes have come after the management of a large number of pharma companies learnt the lesson hard way. The lessons that expansion based on PPT presentations on market growth are probably not the best way to run business, rather ensuring compliance to regulatory requirements is more important. So sectors like pharma which have seen a very long phase of business remodelling and valuation readjustment need to be brought back on the watch list.

At a time when everything on the street appears good and green, there is a case of being selective. The reason, if it is in a raging bull market, the street never stays in this all good and green mode forever.when the street starts to become selective, it is stocks where there are some improvement in the business operating matrix tend to weather the storm better. So as an investor, one needs to look at every sector and company and their operating and valuation matrix separately. These selected stocks depict a strong upward trajectory in their overall average score which is based on five key pillars i.e. earnings, fundamentals, relative valuation, risk and price momentum. This implies that there has been a significant improvement in their market outlook in the given time frame.

In 2008, the IPO of a power company got subscribed in less than a minute of its opening and the size of that issue was Rs 11,563 crore. This just shows the desire to own power sector stocks at that point of time. From those days of frenzy to the nadir in 2014, when power companies were on the top of the list of NPA of the banks. Power companies have seen both the extreme of valuations. It is a sector where after many failures and to some extent a consolidation, some companies have emerged which know how to deal with all kinds of economic and industry cycles. That is probably the reason why a number of companies from the power sector have seen a sharp re-rating in the last one year. Hoping the survivors have learnt their lessons.

The positive momentum in the country's markets helped their case. Some big names on the list include IndusInd Bank, Hindustan Aeronautics, Titan, Ultratech, Kotak Mahindra Bank, and Indian Oil Corp. In contrast to the three consecutive months of decline beginning in January, the S&P BSE Sensex index gained approximately 2% in May 2023, helped by consistent FII buying despite mixed global cues.

Except for a pocket in which demand for covid drugs led to sharp surge in pharma stocks, the pharma sector had been under pressure for a long time. After a long phase of consolidation, in which some companies have implemented change in their business model, are pharma stocks close to breakout ? Stock Reports Plus, powered by Refinitiv, is a comprehensive research report that evaluates five key components of 4,000+ listed stocks - earnings, fundamentals, relative valuation, risk and price momentum to generate standardized scores.

While the under current of the market is still bullish but as corrections and consolidation are part of every bull market, nifty is moving in and out green, there are clear signs of profit booking taking place in the broader market with market breadth not being as positive as it used to be. While the initial part of any volatility is led by large caps, there is a higher probability that the large caps are able to stabilize much before any part of the market. So, if one is thinking of fresh exposure to the market it would be better to stick with large caps. ET screener powered by Refinitiv’s Stock Report Plus lists down quality stocks with high upside potential over the next 12 months, having an average recommendation rating of “buy” or strong buy . The screener applies different algorithms for all BSE and NSE stocks.

One day up, another day down and there is no dearth of explanation for each move of the market. After a strong run up, stock prices are bound to see some correction and the markets are likely to be volatile. First phase of volatility is always led by large caps as they have high institutional holdings. But over the long term, they tend to outperform and the drawdown is lower as compared to mid and small caps. So, at times large caps might optically appear to be underperforming and that may be an opportunity to look at some stocks with a long term perspective.