The Indian pharmaceutical industry is gaining steam, and the results are reflected in the S&P CNX Nifty, the leading index for large companies on India's National Stock Exchange. According to analysts at Avendus, this trend will has already added 200 basis points to pharmaceuticals on the "Nifty Fifty," and is likely to increase their weight to 5% by the end of FY2013.
Monica Joshi of Avendus says Indian pharmaceuticals score as defensive plays due to their relatively low P/Es, high earnings growth, and a shrinking price/earnings to growth (PEG) gap. However, they are now "much more than a defensive."
Until now, the industry has relied on shipping exporting generics to the United States. Opportunities are declining there, though, and investors are increasingly focusing on domestic production and exports to non-U.S. markets. Companies that have built their own pipelines instead of relying on "Para-IV" challenges to U.S. drug patents will benefit from their attention.
Avendus recommends Dr. Reddy's Laboratories (RDY), which has a strong U.S. pipeline and has announced an increased focus on "innovation-driven generics." Joshi also sees Sun Pharmaceuticals as "classic defensive bet," while Cipla Limited has "also emerged as a value preserver in a volatile environment."
Given its increasing importance, however, the best way to gain exposure to Indian pharma is likely to be the iShares S&P India Nifty 50 Index Fund (INDY). This ETF has risen nearly 25% in the last year, and is now trading near $25 per share.