Pharma sector: The key factor that drives returns

In-depth analysis

In one of my earlier posts, we discussed the one key factor that drives the business performance as well as stock price of oil production companies. This key factor was potential volume growth. For instance, for ONGC here’s what I mentioned in the post:

ONGC has set ambitious targets to increase its total production from 39 million metric tonnes of oil equivalent (mmtoe) currently to 47 mmtoe over the next three years. This represents a significant growth rate from here on.

Remember, higher production directly leads to more oil being available for sale. This increase in sales volume translates to higher revenue, assuming the demand remains constant or increases.

The expectation of higher volumes was based on the fact that ONGC’s major offshore project called KG-98/2 (KG standing for Krishna-Godavari basin), which is located off the east coast of India, has huge oil and gas reserves and would contribute to major ramp up in volumes going forward.

Anyway, remember that we also valued ONGC here and the stock is already up 20% since.

My point is, it helps analysts to (1) understand and then (2) look out for sectoral factors that may act as triggers for the stock price performance of companies in a particular sector. For oil and gas sector, the X-factor is volume growth.

How about the pharma sector?

Which is the key trigger — the X-factor — in the sector that move stock prices of Indian pharma companies?