Will Nifty Pharma Run-Up Sustain? DAM Capital's Nitin Agarwal Weighs In
Pharma companies have a decent growth visibility over the next two to three years, says Nitin Agarwal.
The recent Nifty run-up saw pharmaceuticals surge and outperform, which can be due to the reasonable earnings visibility afforded by it in the near term, according to DAM Capital Advisors Ltd.
"Pharma companies have a decent growth visibility over the next two to three years," Nitin Agarwal, head of institutional equity research, at DAM Capital Advisors, told BQ Prime.
The large caps, which are responsible for how Nifty Pharma fared, are performing well, he said.
According to him, two factors led to the sector's outperformance. Domestically, there was a consistent performance. He gave the example of Mankind Pharma Ltd., which had good valuations indicating that people are willing to pay for a domestic-focused business.
In terms of generic exports, which was struggling for the last two years, there was some easing of competition in the U.S. as stated by companies in their recent commentary, which is changing things on the margin front gradually, Agarwal said.
Agarwal said the exports story revolved mainly around large caps, which have higher exposure to generics, while mid caps are mostly a domestic story. "Three to four of the large-cap companies have a tailwind of gRevlimid earnings."
The opportunity is expected to stay until 2026 and this gives an additional delta to the earnings of these large-cap companies, he said.
Some of the companies that don't have gRevlimid have other interesting launches in the U.S. "Three to four years visibility of earnings is a reasonable visibility and the fact that gRevlimid earnings have been holding up so far, there is incremental comfort of a reasonable delta due to gRevlimid, and the large caps are getting that benefit."
However, one needs to look at companies individually, their growth on base portfolio, new launches and opportunities on supply shortages, he said.
Overall, the export business is well-placed for the next two to three years and hence, visibility in large caps is strong. There is a steady growth story in the mid-cap space as well, according to him.
"While there are concerns on earnings visibility in most sectors, after the recent market run-up, at least on that front, pharma is reasonably well-placed with decent earnings visibility across most companies," Agarwal said.
Order Of Preference
Branded formulations are his top pick in the pharma space. He expects "long visibility of growth with limited fluctuations".
His second choice are companies that are strong in the U.S. The companies that have "a cost-competitive story to participate in the U.S. generics story have a long runway of growth", he said.
His third pick are those which are into contract manufacturing for innovators.