Pharma sees investors cheering bonds, while stocks decline

Pharmaceutical companies have disappointed equity investors on the stock markets in a year that is seeing benchmark indices making new records.

On Friday, the Sensex, benchmark index of the BSE, closed at 32,309, a 21.3 per cent gain so far this calendar year. On the other hand, Sun Pharmaceutical, highest valued Indian entity in the sector, has dropped by 13 per cent to Rs 550 a share on the exchange this year. Similarly, the stock of Glenmark Pharmaceuticals is down by 19 per cent to Rs 717, IPCA Laboratories is down by nine per cent to Rs 484 and Torrent Pharma is down by five per cent to Rs 1,246.

In the same period, corporate bonds of these companies, issued in both the domestic market in rupees and global markets in dollars, have gained. For instance, the yield on Sun Pharmaceutical’s corporate bond maturing this December has gone down by 31 basis points (bps) to 6.66 per cent. Bond prices and yield have am inverse relation. As coupon rates (interest to be paid) are decided at the time of issuance of a bond, its price going up brings down the yield or the net interest earning. The yield for the company’s bond maturing in March 2019 has come down by 17 bps to 6.98 per cent.

In the same period, the yield for the benchmark 10-year government security has shrunk by seven bps to 6.45 per cent and the five-year government security by four bps to 6.53 per cent.

“Pharma companies do not take much of debt. Their credit quality remains good, despite earnings concerns bringing down their stock prices,” says Amey Chalke, analyst with HDFC Securities. Their stock has come down largely on concerns regarding the US markets, where generic products are seeing price erosion for various reasons.

Similarly, the yield for IPCA Lab bonds has shrunk by 44 bps this year for the one maturing in December. And, Glenmark Pharma has seen its bond yield shrinking by five bps to 4.53 per cent. Torrent Pharma has also seen the yield for its bond maturing March 2020 and December 2021 shrinking by 40 bps and 26 bps, respectively.

“When the price of a stock is suppressed, it does not mean the credit quality is down. And, if the credit quality is not down, it will move in line with the rest of the bond,” says Jayesh Mehta, country treasurer at Bank of America Merrill Lynch. “All credit has tightened worldwide and naturally, along with other Indian credit bonds, this has also compressed,” he says.

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