Ashish Rathi & Krishnanath Munde have released a report in which they have made a convincing argument that because most Pharma companies hedge their foreign exchange exposure, the impact of the rupee appreciation would not be seen in the short-term.
They make the important point, based on data, that that the EBITDA margin sensitivity to currency movements is limited and is more driven by drug launches / geographical performances than Currency fluctuations alone.
The authors have concluded that the high growth potential for most stocks in the sector, PE levels with the coverage average of one-year forward P/E at 15x remains attractive. The implied Peg ratio of 1x, with best-in-class return ratios (ROE average ~25%, core ROICs average 19%), provides opportunity for healthy price appreciation of stocks. It is emphasized that, given the performance track record and the possibility of positive surprises (launches unanticipated/ limited competition opportunities), the stocks in the sector provide comfort on the risk/reward scale.
The correction/ under-performance provides an opportunity for portfolio building into high-quality stocks, it is added.