by Aakash Athawasya
Despite rising cases across the country, the stock market has seen both good and bad news. The Sensex and Nifty have risen in the past week as Q4 results come in, with both up by over 3%. In this week’s Analyticks, we discuss:
How is the pharma industry coping with remdesivir demand?
A Covid-19 insurer revives, but for how long?
Screener: Stocks beating the index
Let’s dive in.
Remdesivir demand causes rally in pharma stocks
On April 4, India recorded over 93,000 new Covid-19 cases, the highest in six months. As infections rise, two factors are leading to a rally in some pharma stocks. First, the demand for drugs to treat those already infected. Second, the rollout of phase 3 of the vaccination drive.
Remdesivir is an antiviral drug used to treat Covid-19 patients. Seven Indian pharmaceutical companies are contract manufacturers of the drug. This includes five listed companies - Cipla, Cadila Healthcare (Cadila), Dr. Reddy’s Laboratories (Dr. Reddy’s), Jubilant Ingrevia (erstwhile Jubilant Life Sciences), and Syngene International.
The seven manufacturing companies recorded a monthly production of 31.6 lakh vials of remdesivir. In April, production was ramped up to 38.8 lakh vials a month. With the cases increasing, the government approved 25 remdesivir manufacturing sites last week. This will increase the production to 90 lakh vials a month.
The two largest listed remdesivir makers, Cadila and Cipla, have doubled their production capacities. This will provide a fillip to their revenue in Q4FY21 and Q1FY22. However, margins will be affected because every remdesivir maker decreased prices due to orders from the government. Cadila, which was selling remdesivir at Rs 2,400 per vial - the cheapest in the market - implemented the highest price cut of 62% to Rs 900 per vial.
Brokerages expect EBIT margins of these companies to fall because of these price cuts. Of the remdesivir makers, only Cadila and Cipla’s margins have beaten pre-Covid levels.
For Cadila and Dr. Reddy’s, another boost is their respective vaccines. Cadila expects to receive regulatory approval for its Covid-19 vaccine ZyCoV-D by June. The Sputnik V vaccine to be distributed by Dr. Reddy’s domestically was approved this month. Dr. Reddy’s will receive the first batch of the vaccine from the Russian Direct Investment Fund in May.
With cases rising remdesivir demand will be high, and as phase 3 of the vaccination drive begins, there will be a greater need for a quick rollout and ramped-up manufacturing. As a result, these companies have outperformed the benchmark Nifty 50 and the Nifty Pharma index.
Brokerages are not too excited by this though. ICICI Securities, in a note, expects the March-April rally to be the peak for these companies in the short term. The brokerage has downgraded the two vaccine pharma stocks - Cadila and Dr. Reddy’s. Looking at the valuations of these companies, it looks like any upside is priced in.
A second wave brings more of the same for ICICI Lombard
ICICI Lombard General Insurance (ICICI Lombard) was one of the first general insurers to cover Covid-19 under its health insurance policies. While this did boost its health insurance premiums, motor insurance declined. As the second Covid-19 wave takes India by storm, a similar story could pan out in the first half of FY22.
The insurer reported gross premiums of Rs 3,559 crore in Q4FY21, a 6% rise on a YoY basis. But gross premiums fell by 13% QoQ. This was because of a high base in Q3 as high motor insurance premiums rose above pre-Covid levels. On the other hand, claims paid rose 5% QoQ in Q4FY21 to Rs 1,665 crore.
In Q4, motor insurance premiums were Rs 1,621 crore, a 2% QoQ growth after a big jump in Q3. This was because of a ramp up in the sales of passenger vehicles and two-wheelers (83% of motor insurance premiums) during the festive season in October and November. Since motor insurance premiums contribute 60% of gross premiums, this led to a 26% QoQ increase in gross premiums in Q3.
In April 2020, ICICI Lombard launched a Covid-19 health insurance cover. While the company did not report Covid-19 premiums separately, the company’s CFO Gopal Balachandran said that they have been growing steadily in FY21. In Q1, health insurance premiums were Rs 588 crore, a 6% rise YoY. This growth continued in Q2 and Q3. However, the company’s health insurance premiums declined in Q4.
ICICI Lombard reported Rs 654 crore in net health insurance premiums in Q4, a 4% fall QoQ. This decline in net premiums was due to the Covid-19 premiums as Balachandran said non-Covid health cases did not reduce in the Q4FY21.
By the looks of it, FY22 is beginning as FY21 did, with Covid-19 cases increasing and lockdowns. If this continues, the story will be the same for the general insurer. Motor insurance premiums will fall and claims paid will rise. Considering this segment is 60% of its insurance premiums, ICICI Lombard is in for a difficult start to FY22.
But all this depends on how severe the second wave will be, so it is fingers crossed for ICICI Lombard.
Shrugging Covid blues, some stocks outperform the benchmark
As Covid-19 cases rise, the stock markets have turned volatile once again. In this tumultuous market, some stocks are beating the Nifty 50. This screener lists Nifty 500 stocks that have outperformed the benchmark in the past month.
With pharma the flavour of the season once again, it’s no surprise that the sector has 34 companies outperforming the benchmark index. The highest gainers from the sector are Dishman Carbogen Amcis, AstraZeneca Pharma India, Cadila Healthcare and Laurus Labs.
Another sector back in focus is IT services. Two of the big-4 IT services companies have outperformed the benchmark - Wipro and Tata Consultancy Services. But the best performing IT services stock has been Happiest Minds Technologies, up by 24% in the month and by 75% since listing last September.
A notable sector absent from the list is automobiles. Motherson Sumi Systems is the only one here - the auto-components maker’s demand from the European market (for mirrors and polymers) is holding strong and analysts expect this to continue into FY22. Two-wheeler makers like Bajaj Auto and Hero MotoCorp are facing supply chain issues. Brokerages were already pessimistic about the two-wheeler market, and with the second Covid wave , the outlook is dampened further.
Will these companies continue to outperform the index? We’ll have to wait and see.
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