Markets often tend to be volatile and so, when we see widespread pessimism towards a certain theme sector, understanding the underlying components will help shine light on why that pocket could be a contrarian investment to consider. Of late, the Indian pharmaceutical space has been facing numerous headwinds in the form of US Food and Drug Administration (USFDA) concerns translating into considerable price erosion. Consequently, the institutional ownership in this space too has fallen sharply, as the popularity of this sector is currently at a multi-year low. However, on closer inspection, it is visible that many of the pharma players have indigenous positives that are likely to play out with time. The sector is no longer expensive in terms of absolute market capitalisation, which is one of the hallmarks of a contrarian pick. Over the last few years the numbers of inspections have risen. However, this should be seen in the light of the increased volume share of India in the US generic drug market, which has risen to nearly 35% as of 2016, when compared to 28% market share in 2014. It is not only the international markets that can aid pharma’s growth. The burgeoning domestic market is likely to see a leg up as the income per capita and the standard of living improves with the expansion of the economy. India is in the early stages where healthcare as a sector is slowly taking the center stage. Robust balance sheets coupled with good cash flow generation has ensured that the fundamentals of pharma companies remain fairly robust, unlike the stock price, as seen in some cases.

(Economic Times)