The NSE’s index of pharma stocks tanked more than 4% on Tuesday and is among the top underperformers. Investors booked profits in pharma stocks after their rally over the past year and a dip in daily COVID-19 infections.
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The National Stock Exchange’s index of pharma stocks, which generated stellar returns in 2021, has underperformed the Nifty 50 so far in 2021 as investors booked profit. However, experts said this could be a buying opportunity, especially in stocks such as Dr Reddy’s Laboratories and Alembic Pharma.
The Nifty Pharma index fell 4.3 percent on Tuesday, its worst daily decline since December 21, 2020, when it registered a 3.79 percent drop. The index has advanced 8 percent compared with an over 12 percent increase in the Nifty 50.
Technically, the Nifty Pharma is well below the crucial short-term moving average on the daily scale that includes the 5, 10, 20 and 50-day moving averages.
All the 10 stocks in the Nifty Pharma index declined, with Dr Reddy’s falling over 10 percent, followed by Aurobindo Pharma (down 4.6 percent), Lupin (down 4.3 percent),and Cipla (down 3.5 percent).
Alembic Pharma, which is not part of the Nifty Pharma, fell more than 11 percent on weak June quarter earnings. Shares of the company slipped for the second day in a row, a day after posting a 45 percent drop in net profit and withdrawing its growth guidance for FY22.
Lower earnings from Dr Reddy’s for the June quarter triggered the fall in the pharma pack. The company reported a consolidated profit of Rs 570.8 crore in the quarter, a 1.5 percent drop from a year ago, missing analysts’ expectations.
The company said it received a subpoena from the US Securities and Exchange Commission on July 6 seeking documents pertaining to certain Commonwealth of Independent States countries and was responding to the same. The company had also commenced a detailed investigation into an anonymous complaint.
“Pharmaceutical stocks have been in traction since the breakout of the novel coronavirus. However, drug formulation companies are having a tough time impressing the bourses,” said Mohit Nigam, head, PMS, of Hem Securities. “The sector went through several headwinds and lower hospital procedures, which impacted the top line and margins. Dr Reddy’s, the leading pharmaceutical company, reported 11% YoY growth on a low base. The company is struggling to keep up with drug prices and new launches have failed to boost revenue.”
Nigam added that the results were not terrible, but after a long bull run, the market tends to punish heavily for minor faults.
What should investors do?
The pharma sector, which performed largely in line with benchmark indices, could undergo some consolidation after a mega rally in 2020, but experts said that in 2021, investors can look at picking select stocks on dips.
“Pharma stocks have seen a huge rally over the past year and a dip in daily COVID-19 infections has resulted in profit booking,” said Likhita Chepa, a senior research analyst at CapitalVia Global Research. “Also, companies in this space coming up with mixed results appears to be hurting investor sentiments. However, investors can use this correction and find an opportunity considering the company’s fundamentals and prospects as valuations have cooled down a bit compared to the previous financial year.”
She added that healthy Union Budget allocations and increased focus and awareness on individual health are expected to drive this sector.
We spoke to Mazhar Mohammad, chief strategist – technical research & trading advisory, Chartviewindia.in, for his take:
Dr. Reddy’s Laboratories: Exit on a bounce towards Rs 5,000
In the third week of September 2020, this counter witnessed a sporadic rise from lows of Rs 4,336 to a high of Rs 5,497. Since then, it slipped into a corrective and consolidation phase with a broader trading range of Rs 5,500- 4,300.
A sharp reversal in the last session from highs of Rs 5,444 is confirming a top around recent highs of Rs 5,600, which has not only erased the laborious gains of the last several weeks but seems to have set the tone for a fresh leg of downswing which should ideally take it back towards Rs 4,300 levels.
However, in between, some support can be expected around Rs 4,700 levels. If this counter consolidates around these support levels, some decent pullback can be expected.
Therefore, for the time being, if someone is holding this counter, then they should exit either on a bounce between Rs 4,950-5,000 levels or on breach of Rs 4,780.
Alembic Pharma: Can exit on breach of Rs 800
After hitting a lifetime high of Rs 1,128 in August 2020, this counter slipped into a multi-month consolidation phase with a broader trading range of Rs 1,130 to Rs 865 levels.
With a sharp fall seen in the last session, this counter appears to have registered a consolidation breakdown by opening up bigger downsides with a range breakdown target placed around Rs 600.
However, in the next few sessions, if this counter manages to sustain above Rs 800 levels, then it can make an attempt to bounce into the zone of Rs 844-856 levels.
If someone is holding this counter, they should exit either on breach of Rs 800 levels or make use of any bounce into the zone of Rs 840-855 levels to exit.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
