Shares of pharmaceutical companies seemed oblivious to the carnage in the markets on Monday, with the Bombay Stock Exchange (BSE) Health Care index?losing just 0.2% in value.
Both the Sensex and the broader BSE 500 index lost 5% in value, taking cues from the fall in US stocks last Friday and the drop in Asian markets on Monday. The pharma industry got a fair bit of mention in this year’s Budget, with a number of positive announcements, but an analyst with a foreign brokerage said he doubted the resilience in pharma shares had anything to do with the Budget.
The upside from the Budget had already been factored in on Friday. In any case, the benefits weren’t huge.
The cut in excise duty from 16% to 8% will have a limited impact. Unlike some other products, pharmaceuticals aren’t so price-sensitive that excise-related cuts will lead to a surge in demand.
So, firms are likely to retain some of the benefits and earnings may increase. Morgan Stanley recently estimated the earnings of the firms under its coverage may increase between 1.
5% and 4.5%, on the assumption that 40% of the duty cut is retained by firms.
Companies that have heavily invested in setting up facilities in tax-free zones, such as Baddi and Sikkim, may stand to lose out. The transportation cost from these facilities is significant, and devoid of the 16% excise differential, their cost benefit of these units would be reduced substantially.
Firms that conduct clinical trials in their overseas units haven’t got the benefit of weighted deduction on the research and development spend. The markets were expecting this, which explains why shares of Sun Pharmaceutical Ltd’s hived-off research and development wing have lost more than 4% since the Budget announcement.
In sum, the Budget proposals hardly provide any reason for pharma shares to outperform the market by around 7%. Their outperformance lately could well be because they are being seen as a defensive play in a falling market.
Apart from the FMCG index, the pharma index has fallen the least from its highs in January. These stocks had underperformed the market by a large margin in the past and since prices of generics have already fallen sharply in most markets, earnings growth is expected to be steady in the near future.
With valuations already running low, pharma stocks are among the few where the downside seems limited.
http://in.news.yahoo.com/mint/20080304/r_t_mint_bs_budget08/tbs-pharma-shares-act-as-defensives-a839eca.html
Both the Sensex and the broader BSE 500 index lost 5% in value, taking cues from the fall in US stocks last Friday and the drop in Asian markets on Monday. The pharma industry got a fair bit of mention in this year’s Budget, with a number of positive announcements, but an analyst with a foreign brokerage said he doubted the resilience in pharma shares had anything to do with the Budget.
The upside from the Budget had already been factored in on Friday. In any case, the benefits weren’t huge.
The cut in excise duty from 16% to 8% will have a limited impact. Unlike some other products, pharmaceuticals aren’t so price-sensitive that excise-related cuts will lead to a surge in demand.
So, firms are likely to retain some of the benefits and earnings may increase. Morgan Stanley recently estimated the earnings of the firms under its coverage may increase between 1.
5% and 4.5%, on the assumption that 40% of the duty cut is retained by firms.
Companies that have heavily invested in setting up facilities in tax-free zones, such as Baddi and Sikkim, may stand to lose out. The transportation cost from these facilities is significant, and devoid of the 16% excise differential, their cost benefit of these units would be reduced substantially.
Firms that conduct clinical trials in their overseas units haven’t got the benefit of weighted deduction on the research and development spend. The markets were expecting this, which explains why shares of Sun Pharmaceutical Ltd’s hived-off research and development wing have lost more than 4% since the Budget announcement.
In sum, the Budget proposals hardly provide any reason for pharma shares to outperform the market by around 7%. Their outperformance lately could well be because they are being seen as a defensive play in a falling market.
Apart from the FMCG index, the pharma index has fallen the least from its highs in January. These stocks had underperformed the market by a large margin in the past and since prices of generics have already fallen sharply in most markets, earnings growth is expected to be steady in the near future.
With valuations already running low, pharma stocks are among the few where the downside seems limited.
http://in.news.yahoo.com/mint/20080304/r_t_mint_bs_budget08/tbs-pharma-shares-act-as-defensives-a839eca.html
