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The pharmaceuticals and fast moving consumer goods (FMCG) sectors were the classical "defensive" sectors that insured investors against volatility elsewhere. But over the last year and more, a slew of factors has intervened and turned the two sectors, long adored by investors, into also-rans. Result: the bull run, that has driven up valuations almost across the board, has largely bypassed companies in these sectors.
The numbers are telling. In this year's BT 500 list, which ranks companies on the basis of their market capitalisation, Hindustan Unilever, still the country's largest FMCG company, has fallen to the #16 position from #7 last year, while ITC, Nestle and Dabur have fallen from #6, #40 and #51 to #10, #58 and #70, respectively. In the pharma pack, Sun Pharmaceuticals has fallen from #28 to #36, Cipla from #24 to #45, Ranbaxy from #38 to #48 and Dr Reddy's Laboratory from #37 to #59. "The growth rates both in pharma and FMCG are far too low and don't compare with high growth industries like telecommunication, engineering, retail and real estate," says Amod Karanjikar, analyst at Edelweiss Capital.
But players in both sectors feel the future will be brighter than the immediate past. And they are all restructuring, reinventing and repositioning themselves to ensure that (see A Ray of Hope). Several Indian pharma companies are hiving off their long-gestation, high-risk drug discovery businesses into separate companies. DRL was the first off the block and set up a separate drug discovery unit way back in September, 2005; Sun Pharma followed suit six months later. In the last six months, Nicholas Piramal, Ranbaxy and Wockhardt have decided to hive off their drug discovery units. "This will not only help these companies derisk their generics business, but also support capital mobilisation in the newer ventures in future," says Komal Sharma, Managing Director, Lupin, the country's sixth-largest pharma company.
Pankaj Patel, CMD, Zydus Cadila, whose drug discovery unit is still a part of the company, says: "The risks involved in the generic business are far lower compared to that in the drug discovery space." Adds a Sun Pharma spokesperson: "Our rationale was simple: these two businesses...