Home / Money / Personal Finance /  Has the pharma sector become attractive after the recent market correction?

The pharma sector looks set for a good show over the next five years after underperforming over the last one year, say experts. Over a one-year period, pharma funds have delivered a negative return of 11% to investors. On a long term though, this thematic category has been among the top performers.

Sailesh Raj Bhan, deputy chief investment officer–equity, Nippon India MF, said, “Excess stocking in the supply chain, rise in raw material costs related to China-led shortages, and weak pricing in the US markets are key reasons for the near-term weakness."

However, Bhan believes that some of these trends are bottoming out and the improvements should reflect in pharma firms’ earnings in the next few quarters.

Industry experts believe that recovery in the non-covid business of pharma companies is a key tailwind for this sector. “While covid-related sales are coming off for pharma and diagnostics, the non-covid business, which is a much larger pie, is just starting to recover. This would lead to high margins driven by operating leverage," said Aditya Khemka, fund manager, InCred PMS.

Khemka is of the opinion that high-interest rates and price increase-related demand destruction in discretionary consumption is likely to deviate investors’ interest from cyclical to defensive sectors such as pharma.

A key headwind for the sector is the dependence on China. “While the sector is working on decoupling from China, it may take two to four years before we can see the impact of decoupling. Till then, the dependence on China for basic raw material is likely to remain high at 70-80%," said Khemka.

Further, an unforeseen rise in input costs spurred by global inflation is a key monitorable, which can impact the optimistic outlook.

In terms of outlook, Khemka is positive on branded generics, hospitals, diagnostics and active pharmaceutical ingredient (API)/chemicals/contract research and manufacturing services (CRAMS) segments. On the other hand, he is bearish on unbranded generics.

Tarun Birani, founder and CEO of TBNG Capital Advisors believes that on a bottom-up level, many of the pharma companies with strong balance sheets, cash flows and strong market share, can lead to a good runway for price and EPS growth over three to five years.

However, investors should note that thematic funds are riskier than diversified funds.

“From a risk management as well as alpha generation perspective on the overall portfolio, the sweet spot for thematic funds can be around 5-10%. If the theme is too compelling, the other diversified funds in your portfolio will also take that tilt towards the theme through active management. Hence, we can cap it at 10%," says Birani.

ABOUT THE AUTHOR

Abhinav Kaul

Abhinav Kaul writes on cryptocurrencies and mutual funds at Mint. His previous stints include ETMarkets, Reuters Bangalore and Press Trust of India.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout