In the pink of health

Mumbai: At a time when IT and entertainment stocks are turning out to be unpredictable options, there is a safe sector that is solidly growing at around 18 per cent annually. And it's time an investor knew more about pharmaceutical stocks, which have been touching record highs in the current groundswell of appreciation on Indian stock markets.

What makes the above statement stronger is that foreign institutional investors (FIIs) are gleefully returning to the Indian bourses with their recession-battered funds, if the accompanying table FII investment in India is any indication.

Admittedly, pharmaceutical stocks have been the darlings of investors (see table 'How they fared'). And leading the pack is Orchid Chemicals, which has done exceptionally well — the company's shares appreciated by 188 per cent, spurred by a jump in profit-after-tax by 210 per cent for the year ended March 2003.

The return of FIIs to the stock markets is a sure sign that the bourses are putting on weight. Encouraged by a strong rupee, even non-resident Indians are investing heavily. Also, what is heartening to them is the fact that foreign investment by multinationals in the pharmaceutical sector has grown.

How did it come about? The government raised foreign investment in the pharmaceutical sector from 51 per cent to 74 per cent in March 2000 and further raised it to 100 per cent. Definitely, something is behind the soaring optimism. But, should optimism be tempered with caution, especially in view of the forthcoming general elections?

Says a pharmaceutical analyst at a public sector bank's mutual fund: "Several pharmaceutical companies in places like Hyderabad are contract-manufacturing for foreign companies — a reason why exports are booming. But the polls will not affect the pharma industry as it has shown consistency and stability during elections in the past."

Adds an industry observer: "Lots of companies are applying for US Food and Drugs Administration approval for manufacturing facilities. They are also seeking permission to market their generic products in the US. With the implementation of the World Trade Organisation's Intellectual Properties Rights regime in India in 2005, numerous patented pharmaceutical products will enter India through manufacturing facilities established here by multinationals. At the same time, several generic products manufactured by Indian companies will enter the markets of the US, Europe, Asia and Africa."

So, where will Indian companies figure in the scheme of things post-2005? Research and development, of course. The government is leaving no stone unturned in its efforts to encourage R&D in the pharma sector. It has given the pharma industry the facility of weighted deduction of 150 per cent of the expenditure incurred on in-house R&D.

This also includes expenses incurred on filing patents, obtaining regulatory approvals and clinical trials. These measures have converted India into a low-cost manufacturer of bulk drugs and formulations. The government is also in the process of relaxing the rigours of price control as part of its continuing process of liberalisation.

According to an analyst, pharma stocks will surely appreciate in the current scenario. "But a downward correction is due shortly and that's nothing to be worried about. The overall picture is one of optimism and health." It's good news.

When it rains people normally run for cover for fear of catching a cold. And those who have invested in pharma stocks are keeping their fingers crossed. They are hoping that a short-term downward correction will not make them run for cover.