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The pharma sector in the last three to four years has under performed because of various headwinds both in India and US (accounting for 70-75% of business and industry level).Photo: Pradeep Gaur/Mint
The pharma sector in the last three to four years has under performed because of various headwinds both in India and US (accounting for 70-75% of business and industry level).Photo: Pradeep Gaur/Mint

SBI Mutual Fund is bullish on this sector over 1 to 3 years

  • Opportunities exist in some pharma stocks
  • Avoid stocks with corporate governance issues

Covid 19 has brought back the spotlight on the pharma sector which was going through a lackluster performance for last few years. Pharma sector is the best performing sector at present. Year to date, the benchmark BSE Healthcare index has risen by over 40%. From the March lows, the sector index has grown by over 70%. Industry experts attribute the phenomenal growth in the pharma sector to the Covid pandemic which has given more prominence to it.

"Covid19 situation has provided an opportunity to the Indian pharmaceutical industry to play an even more important role in global healthcare space and the change has been positive with in general higher procurement of medicines which is driving the performance," says Tanmaya Desai, fund manager, SBI Mutual Fund.

The pharma sector in the last three to four years has under performed because of various headwinds both in India and US (accounting for 70-75% of business and industry level).

Mutual fund manages believe the pharma companies are expected to benefit in the near term due to supplies of Covid drugs. They say the pandemic has improved the outlook for growth in the exports market for the sector. The improved outlook is expected to reflect in the earnings which in turn will boost the returns for investors.

"Though the sector returns may not be what we have seen in the last one year, the prospects of earnings do look good at least over the next 12-24 months and from here on we do see double digit earnings growth for the sector (export led in the near term and domestic business led in the long term) and returns to largely mirror the earnings growth," says Tanmaya Desai of SBI Mutual Fund.

"The sector looks good to invest with a 1-3 year time horizon," Desai adds.

Though the corona virus pandemic has brought back the attention on pharma sector, the regulatory challenges for the sector still exist unresolved, say mutual fund managers. They believe opportunities exist in some stocks.

"Every sector has a cycle. The pharma space has been lackluster for the last several years. The covid pandemic has brought back the spotlight on the sector. We remain stock specific and see opportunities in select stocks. The sector has been plagued with regulatory challenges over the last few years and that uncertainty quotient has not gone away. As investors it is imperative to keep your eyes peeled and ears to the ground at all times," says Jinesh Gopani, Head-Equity, Axis Mutual Fund.

Stocks with corporate governance issues or those plagued with regulatory issues should be clearly avoided.

"While picking stocks for SBI Healthcare Opportunities Fund, certain class of stocks are clearly avoided - stocks where question marks have been or are being raised on the quality of management or corporate governance of the company, and stocks where regulatory issues are certain to have a toll on the future profitability of the company," says Desai.

Being a thematic play, pharma sector carries high risk for investors. Sophisticated investors who understand the sector well and carry a huge risk appetite can allocate some part of their portfolio in pharma sector. Investor should not rush to participate in the rally just by looking at the returns.

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