Torrent Pharma, Mankind, Cipla, others lift Nifty Pharma 1.8%; why are pharma stocks rising in weak market?

Stocks like Torrent Pharma, Mankind Pharma, and Cipla were among other pharma stocks which powered the sectoral benchmark index, Nifty Pharma, up 1.8% on Monday, July 20, as investors focused on defensive sectors amid higher demand opportunity and Indian rupee weakness tailwinds.

NSE data showed that the Nifty Pharma index surged 1.8% or 478.35 points to its intraday high of 26,123.35 points on Monday’s market, compared to 25,645 points at the previous stock market close.

Monday’s rally in pharma stocks comes against the backdrop of a weaker Indian stock market as the benchmark indices witnessed selling pressure over muted private bank earnings, higher oil prices and rising geopolitical risk sentiment.

In the afternoon trading session, the NIFTY50 index was down 0.63% at 24,180 points, from 24,334 points at the previous close. While the BSE SENSEX lost 0.78% to 77,548 points, compared to 78,151 points at the previous close last week, according to the exchange data.

With the ongoing Q1 earnings season, market experts have predicted that the Indian pharma sector is expected to witness a stronger footing than several other sectors, despite margin pressures due to higher input costs and pricing dynamics in the US market.

Why are pharma stocks rising today?

Pharma stocks were witnessing strong buying support from investors on Monday, July 20, due to a preference for defensive sector bets amid weak equity market cues and certain key growth tailwinds for the sector in the upcoming period.

Investors shift their buying strategies as the equity markets witness pressure from crude oil prices rising above $91 per barrel, divided expectations of a rate hike from the US Federal Reserve, and the Q1 earnings season impact.

“When the broader market is under pressure from the crude spike, the Fed hawkishness, and the tariff rhetoric, capital rotates into earnings streams least correlated to the domestic cycle, and pharma is the classic destination. But this is not purely a defensive trade,” said Harshal Dasani, Business Head of INVAsset PMS.

The expert also explained that the demand for pharma stocks is not just a defensive trading strategy, but investors are looking forward to Indian companies potentially supplying US generics to aid the ifosfamide oncology shortage in America.

Global brokerages like the US-based leading investment firm, Jefferies, have highlighted key risks based on the timely US FDA approval for the Indian pharma companies, as if not approved, it can potentially impact the sentiment of investors in the respective companies.

Investors will keep track of Indian companies like Cipla, Dr Reddy’s, and others receiving US FDA approvals, which along with the demand in the United States, is expected to serve as a positive catalyst for the companies.

“Rupee weakness adds a translation tailwind for export-heavy names,” said Dasani.

Top pharma stocks in focus

*Note: All data related to the current market price, intraday returns, 1-month returns, and YTD returns have been collected from the NSE website.

What are key concerns for pharma stocks?

Pharma sector companies have been witnessing major pricing pressure in the US generics market, and with the higher export cost due to the West Asia crisis, the impact risk of the same can potentially be felt by the firms.

“Key headwinds include pricing pressure in the US generics market, higher freight and raw material costs following disruptions in West Asia, regulatory observations from global agencies and currency volatility,” said Aparna Shanker, CIO-Equity of The Wealth Company Mutual Fund.

The expert also explained that although the Indian domestic formulations market in the pharma sector remains healthy, the companies exporting to foreign countries continue to navigate a challenging global pricing environment.

With largely export-focused companies in the Indian pharmaceutical sector, shipping disruptions, increasing logistics costs and extended delivery timelines are concerns looming over the firms.

“Although most companies have diversified logistics networks and maintain inventory buffers, prolonged disruptions could impact working capital and gross margins if freight costs remain elevated,” Shanker said.

What’s next for pharma stocks?

In the Q1 earnings, investors should look out for pricing and volume trends in US generics, growth in the domestic formulations market, the EBITDA margins of the companies, and regulatory updates.

Key focus will also remain on the management commentary of the pharma companies as product launches, speciality portfolios and future guidance can potentially uplift or weigh down the market sentiment.

Aparna Shanker said that in the medium-term, the outlook for pharma stocks remains constructive as the companies with differentiated product pipelines, speciality portfolios, strong compliance records and diversified geographic exposure are likely to outperform.

“While near-term earnings may remain mixed, structural drivers such as increasing global outsourcing, chronic therapies and speciality medicines continue to support the sector's long-term investment case,” said Aparna Shanker, CIO-Equity of The Wealth Company Mutual Fund.

In line with the expectations, Harshal Dasani highlighted that the Indian pharma sector has three durable engines: the GLP-1 and peptide wave, the CDMO structural story, and the compounding domestic chronic-therapy.

“The outlook is constructive with selectivity,” said Harshal Dasani.

The expert also said that based on the current pricing framework, diversified large-cap pharma companies with US speciality pipelines and CDMO exposure will remain in key focus over just commodity generic exporters in the upcoming period.