Why Pharma Shares Are Not A Great Buy?

Updated: Friday, April 17, 2015, 8:45 [IST]

If there are two sectors that are highly over priced, it is the pharma and FMCG sector. The rationale and logic for such high valuations in the pharma sector is difficult to explain.

In fact, its simply because investors, particularly the large institutional investors are not able to find many companies that are growing at a brisk pace, other than pharma companies.

Take a look at the price to earnings multiple of some of the pharma companies.

P/E of pharma companies

Glenmark Pharma: 46
IPCA Labs: 49
Wockhardt: 15
Sun Pharma: 65.2
Lupin Labs: 54
Dr Reddy's: 200
Cipla: 42

Why Are There Such Rich Valuations?

FIIs, who currently own around 25 per cent of the Inian makets, find it difficult to identify good quality stocks from a sector that is growing. If you take off metals and infra which is the preferred space for FIIs, it leaves them with banking, IT, Pharma and FMCG.

So, they keep chasing stocks from the FMCG and pharma space, which has resulted in valuations of both these sector turning horribly expensive.

Time to book profit

I you have made money in pharma companies it is time to book profits. The problem for the leading pharma companies is that they are heavily dependent on the US markets for their exports. A ban by the US FDA can result in huge losses and this has happened in the past for companies like Wockhardt, IPCA Labs etc.

Also, the companies are not growing a 100 per cent each year to command such high valuations. So, if there is any further rally in these stocks it maybe time to book profits.

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