Contrarian investors looking for a sectoral bet after the sharp rise in broader markets can consider pharmaceuticals stocks, which have been underperforming in recent times, according to fund managers and analysts. While several pharma companies continue to face pressure on profitability, their share valuations are cheaper, they said. Investors confused about which stocks to pick could consider mutual fund schemes that invest in pharma stocks.
In the past one year, the Nifty Pharma Index has shed 12.4% as against the 1% gains in the benchmark Nifty 50. Mutual Funds that bet on pharma stocks have fallen 14.2% on an average in the past one year. So far in 2022, they have declined 12.4% on an average, according to Value Research.
Fund managers said the underperformance has eased valuations in the sector.
Though the estimated Price to Earnings (PE) ratio – a popular valuation measure – is at 22.5 times- in line with the 10-year average, its premium compared to the broader market has shrunk.
“The premium to the broad BSE 100 has come down to 13%, compared to an average of 34% for the last 10 years,” said Vrijesh Kasera, equity fund manager – Mirae Asset Investment Managers.
Fund managers said investors could stagger their bets in the sector over the next three to six months as pressure on their earnings is yet to ease.
“US generics after a lull in 2020 started seeing heightened pricing pressure. Large companies continue to face issues with USFDA,” said Kasera.
Given that inflation is expected to remain high globally, fund managers believe companies in this space are much better positioned to pass on rising costs to consumers and can maintain margins.
“Companies in the branded generic and hospital business that account for one-third of the healthcare index did well. However, the other three segments of the index namely API, unbranded generic and diagnostic space which account for the balance two-thirds of the weight underperformed due to stiff competition, pricing pressure and higher raw material costs,” said Aditya Khemka, fund manager, InCred PMS, which runs a healthcare fund.
Branded generics, hospitals and diagnostics and APIs could see margin pressures easing due to a fall in raw material prices from their peak.
Fund managers believe medical tourism is coming back to normalcy and companies have started to communicate that the pressure in the US has normalized to a large extent.
Khemka believes a pick-up in medical tourism after Covid relaxations across the globe is likely to increase margins for hospitals. Branded generics could do well as raw material pricing pressure eases and brands have pricing power, though concerns remain on US generics.
Financial planners said investors could allocate 5-10% of their equity portfolios to the pharma sector. “Pharma companies are cash positive with the ability to pass on increased cost and are less impacted in an inflationary environment as purchase is unlikely to be postponed,” said Rupesh Bhansali, head (distribution), GEPL Capital.