The Good & Bad Of India's Pharma Sector

March 6, 2020

The current market environment remains choppy, so we want to revisit a sector that's showing relative strength, Pharma.

In November we pointed to the improving prospects of the Nifty Pharma Index and its components, following up with additional trades in January.

Today, we want to revisit the sector to see what's changed and what stocks we want to be buying and selling.

First, let's start with the Nifty Pharma vs Nifty 500 ratio chart that continues to turn higher after meeting our downside objective late last year. This continues to suggest further outperformance from the Nifty Pharma sector relative to the broader market.

Click on chart to enlarge view.

Looking at the Nifty Pharma Index on an absolute basis is where things get a bit tricky. Prices confirmed a failed breakdown and bullish momentum divergence by closing back above 8,000, but failed to accelerate higher in a meaningful way.

With prices chopping around 8,000, any trades at the index level are likely to whipsaw longs and shorts in and out of their positions, so we'd rather be approaching this sector at the individual stock level where there are a lot of names showing relative strength with well-defined risk.

Before we get into the individual names we like, we thought it'd be helpful to point out a large part of what's holding the index back. Much like the IT sector, Pharma's largest component, Sun Pharma, makes up roughly 22% of the index and remains weak.

After failing to confirm a trend reversal in September 2018, the stock has continued to struggle, stuck in a year-long range of lower highs and continued support at 365. For now, this looks like a bearish continuation pattern that would target 281 on the downside if the lows of 365 are broken decisively.

Until Sun Pharma stock can gain its footing and begin to trend higher, the Nifty Pharma Index is unlikely to gain sustainable upside traction.

As a result, we'd prefer to stick with the stocks that continue to trend well and offer a reward/risk that's skewed in our favor.

Before we get into the stocks, we want to point out that the majority of them are ones we've discussed in the past that continue to work. As a result, some of them may not actionable at current levels but are either buyable on a pullback or on a fresh breakout, when the reward/risk is more heavily skewed in our favor.

With that said, every person has their own acceptable reward/risk ratio, ways of managing trades, etc. We're simply outlining at what level our thesis is no longer valid.

Now, let's get into the names starting with longer-term setups.

Pfizer Ltd. remains buyable on any weakness towards 3,770 as its weekly uptrend is intact and targets 5,830.

AstraZeneca Pharma India Ltd. is consolidating above its former highs after breaking out. As long as prices are above 2,395 then we can be long with a target near 3,485.

Dr. Reddy's Labs has successfully retested its breakout level, so we want to stay long if prices are above 2,800 with a 4,400 target.

Granules India is a bit extended here, so we need to be aware of the whipsaw potential, but if prices are above 163 then this base breakout is intact and targets 220 on the upside.

Piramal Enterprise is showing a ton of relative weakness, but it recently confirmed a failed breakdown and bullish momentum divergence by closing back above 1,340. If prices are above that level, then we can be long and see how this develops as there's potential for a move back towards 2,000 over the next few quarters.

We want to be buying Alkem Labs on a breakout above 2,725, with a target of 3,975.

Divi's Labs continues to trend well. As long as prices are above 1,900 then we want to be buying weakness and targeting 2,755.

Ajanta Pharma is a bit extended after meeting our upside target of 1,320. With that said, as long as prices are above that level then our next upside target is 1,625.

IPCA Labs is also a bit extended, but as long as prices are above 1,215 then 1,715 remains our target.

J.B. Chemicals & Pharma can be bought on weakness towards 505, with a target near 670.

We can be long Torrent Pharma as long as prices are above 2,030, with a target near 2,565.

Here's Sanofi India Ltd. halfway between our target and risk management level. Any weakness towards 6,585 can be bought with a target near 8,220.

Those are the stocks we like, but in addition to Sun Pharma there are names showing weakness.

Some include Cadila Healthcare, which is stuck below overhead supply at 300. As long as prices are below that level, we can be short/avoiding it on the long side as our long-term downside target is 133.

Glenmark Pharmaceuticals could see some mean reversion in the near-term as well, but ultimately if prices break 280 then there's downside risk towards 182. For the time being, it's stuck in a 290-380 range.