Was Price Action Telling Something That We Ignored?

Pharma has been the flavour of the market moves right after the last week of March 2020. There were talks of global supply chain derisking itself from enormous risk due to unsustainable dependence on China. Indian Pharma listed space started buzzing after 5 years of clear downtrend. There were businesses which doubled the topline and PE shrink to great extent and all of these stocks started firing.

One of the stock that caught our eyes early on was Alembic Pharma.

In last 5 years Alembic Pharma has:
– 3X profits
– PE drops from 50 in 2015 to 17 at CMP of 760. This is after sharp run in last 2 days resulting in 20%+ upmove.

That was on 25th April.

Now let’s look at the chart –

On Apr 23, it crossed the Corona Top and within a month went as high as 900. A sharp move. After that stock consolidated and in July upmove resumed and stock crossed 1100 but could not sustain.

Since then stock has been in two minds and it could not rally and what is even more astonishing is that company is posting blockbuster results and PE is near 18 only.

Then question is if everything is right then why stock is not making move? Why market is not enthused about it anymore? Granted not all pharma stocks running but this has corrected and has been in range for quite sometime even with great growth in the business.

For FY21 company has guided for 60 Rs EPS and on lower side with 20 PE that translates to 1200 for a share. But there is but management has said that even with massive capex they will be doing 50 Rs EPS in FY22. Net Profits degrowing by 17-18% that is what management has guided for FY22 as compared to FY21. That is why market was not really enthused about it in short term. Another thing is promoters selling it to buy more of Alembic Ltd. That has created massive selling pressure which buying is not able to handle and move the prices up.

Does that change anything for the stock in medium term or more? No.
Does that change anything for other group companies? No, but evaluate them on individual basis.

Now stock may run towards 1100 and return from there again facing the resistance of previous ATH. Looks wise to get out from this one around 1100 and if Alembic Ltd is available near 100 then that can be looked at. Otherwise look at other opportunities. This view is strictly for short term. Because if somebody says this business is great, management is top quality and stock will do great in 5 years then we will say remind us again at the end of 4th year till then we are happy to be in the other stocks which are performing.

Do you hold Alembic Pharma? If yes then how are you going to manage the trade given this perspective?

Do let us know what you think about this in comment section.