Valuations of Top Pharma Companies Still High - Chart Of The Day 13 January 2018 - Equitymaster

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Valuations of Top Pharma Companies Still High
Jan 13, 2018

While the implementation of GST did cause a disruption among the unorganised players, there was one sector which has underperformed regardless. The BSE healthcare index was the worst performing sector in 2017. In fact, the sector has underperformed over the past three years.

While 2018 earnings of pharma companies are expected to be better considering the low earnings base in 2017, certain challenges still remain.

The valuations of the top five companies by market capitalization on BSE healthcare tell a different story though. Average Price to Earnings Ratio of the top five companies stands at 36. Considering the headwinds these companies are facing, it certainly seems rich.

An improved earnings performance in 2017 will certainly get these valuations to reasonable levels, provided the share price remains the same. But, the headwinds for the sector still exists.

Quicker ANDA approvals has intensified competition amongst generic players. Also, the recent warning letter to Lupin shows the regulatory overhang hasn't been completely resolved yet.

The top generic companies are trying to move toward low competition drugs, which can be seen by their R&D expenditure towards complex generics. This though will take time and substantial expenditure. It might also mean muted earnings in the next couple of years, before the drugs are distributed into the market.

2018 looks likely to be another challenging year for the sector. The uncertainties make it important to be stock specific in the sector.

As of today, three stocks in the pharma sector are currently buy worthy according to The India Letter (subscription required). These are the pharma stocks we believe will outlast the others in the long run.

Data Source: Ministry od Finance, Goverment of India

This Chart Of The Day was published in The 5 Minute WrapUp - Did GST and Notebandi Help? Sherlock Holmes Finds Out...

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